NCPA - National Center for Policy Analysis

The Links between Quality and Productivity

December 9, 1996

Improving quality is one way to increase "productivity" -- the goods or services produced for a given amount of inputs such as labor and capital. Such quality improvements in health care, finance and business services have been significantly underestimated, says a new DRI/McGraw-Hill study.

Thus productivity increases in service industries may actually be higher than current measures show -- and thus the rise in price indexes may overstate inflation. Productivity growth has slowed since the 1960s:

  • In the current expansion, business productivity has risen at about a 1.1 percent annual rate compared with 2.7 percent from 1950 to 1973.
  • Manufacturing productivity is about 4 percent above last year, but total business productivity is up only 0.5 percent, according to government reports.
  • The slower growth in overall business productivity implies service-sector productivity has actually been declining.
  • But productivity may actually be growing about 2 percent annually currently and in coming years, says DRI, if adjusted for quality increases.

Economists have questioned productivity figures because they don't reflect the massive investment in information technology and the difficulty of measuring service productivity. But if the DRI/McGraw-Hill study is right, U.S. productivity growth -- and national output -- is being understated about three-quarters of a percentage point.

Source: Gene Koretz, "How to Raise U.S. Productivity," Business Week, December 9, 1996.


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