Productivity's important, sure, but why is it important?

The Observer tells us about how Leyland Trucks is driving (sorry) productivity increases somewhere up north of the Marylebone Road:

The enigma of greater efficiency

What is productivity?
Productivity measures the efficiency of an economy by dividing the value of output generated by the inputs employed. The efficiency of the UK workforce is calculated as output per worker, output per job and output per hour.

Why does it matter?
Academics believe productivity gains are vital for improving living standards over the long term. When an economy can create more wealth with fewer resources, the spoils can help pay workers higher wages.

As Paul Krugman has pointed out, productivity isn’t everything but in the long run it’s pretty much everything. But that description of how and why it makes us better off is misleading to the point of being wrong.

We have a limited set of inputs, we are in a world of scarce resources after all. An increase in productivity means that we gain more output from those scarce inputs. Human labour is scarce - sure, there’s a lot of it, but not an unlimited amount - therefore an increase in labour productivity means more is produced from that labour available.

All incomes equals all consumption equals all production, that’s the basic GDP insistence. So, if we’re producing more from our scarce human labour then all incomes and all consumption have risen as well.

That is, we’re not made richer by wages rising, if that indeed happens. We’re made richer by definition if productivity rises. Even if we decide not to increase production but to reduce the labour employed we’re still richer - more voluntary leisure is being richer.

How those new riches get shared out is a secondary question. It being full employment which will lead to the workers getting a cut of it.

The importance of productivity rising is not that wages might rise if something else happens, It’s that by definition the society is richer when productivity rises.