4.3 - Efficiency and Labour Productivity

4.3 - Efficiency and Labour Productivity

1. Importance of Labour Productivity and Efficiency

   • Labour Productivity =
     • Measures the efficiency of labour
   • Efficiency =
     • Takes into consideration all factor inputs (factors of production) - labour, capital, land and natural resources and enterprise
       • Efficiency is defined as: Output (production) is maximized from a given level of inputs
   • BENEFITS OF HIGH LABOUR PRODUCTIVITY
     • Efficient use of inputs allows businesses to maximize production and therefore satisfy the needs of more customers
     • Efficient use of inputs means that fewer inputs are needed to produce a given level of output.
       • This reduces unit costs for the business
     • Lower unit costs enable a business to gain a competitive advantage because a business can lower its prices and yet still maintain the same profit margin
     • Where consumers desire high quality, the cost savings from greater efficiency can be used to improve the quality of the product
     • By comparing its labour productivity with its level of efficiency, a business can recognize whether it should modify the balance of its inputs in order to improve overall efficiency.
       • E.g.
         • If the business has high labour productivity and low efficiency, this suggests that it can improve its efficiency by increasing its labour force and reducing the use of other inputs, such as capital.
           • Similarly, if there is low labour productivity and high efficiency, this suggests that labour should be replaced by other inputs in order to improve overall efficiency.
             • (Poor workforce - replace the bad workers and use their salary for investment in machinery)
           • (Good working workforce, but production line is costly - employ more and have already productive workforce train them)
     • High labour productivity and efficiency can also enable the business to increase its appeal to its stakeholders. Greater efficiency may allow the business to:
       • Pay higher wages to its workers
       • Offer lower prices or improve quality for consumers
       • Spend more money on the local environment
       • Increase overall profits for its shareholders
     • HOW TO INCREASE EFFICIENCY AND LABOUR PRODUCTIVITY
       • Improving the fertility of land
         • Modern agricultural techniques enable farmers to achieve greater output per acre. Similarly, factory farming can enable greater productivity from livestock farming.
       • Using renewable or recyclable resources
         • Many factories are designed now to minimise waste and improve energy efficiency so resources are used more effectively.
       • Greater education and training of the workforce
         • Can lead to far greater output from labour - particularly important in allowing UK businesses to compete with countries with lower wage levels.
       • Increasing the level of investment in capital equipment
         • High quality capital goods like modern machinery can greatly enhance efficiency of a labour force. Businesses that can update to new machinery and technology will be able to operate more efficiently and provide goods and services that meet ever-changing customer needs.
       • Improvements in management skills and a willingness to take risks by businesses
         • Factors of production will be converted into goods and services that meet customer needs.
       • Combining the factors of production in a balanced way
         • Helps avoid reduced efficiency if the factors of production are not used in an appropriate balance
       • Extending the overall scale of production
         • As a business grows larger it tends to improve both labour productivity and efficiency. The benefits that lead to these improvements are known as ECONOMIES OF SCALE
           • ECONOMIES OF SCALE
             • Fixed costs, such as the depreciation of machinery and administrative expenses, must be paid, regardless of the number of units that an organization produces and sells. This enables large firms that utilize their equipment effectively to produce at much lower costs per unit.
               • INTERNAL economies of scale (often abbreviated to economies of scale) can be classified under a number of headings including:
                 • Technical Economies
                   • Modern equipment (lowers unit cost and improves quality) // Mass production techniques can be employed (improves productivity) // High trained technicians (improves reliability of the production process)
                 • Specialisation Economies
                   • Larger firms can afford to employ specialists with particular skills (more skilled so more efficient) but can come at a high cost; if staff can specialise this boosts efficiency majorly
                 • Purchasing Economies
                   • Firms can buy in bulk thus reducing costs // Supplies may give discounts to loyal customers or to guarantee or keep a large customer
                 • Marketing Economies
                   • Expensive media to reach more customers in a persuasive way can increase effectiveness of advertising and reduce unit costs // Large firms can out-do smaller firms in terms of more market research
                 • Financial Economies
                   • Large companies can access loans easier with lower interest rates, and find it easier to access funds through other sources
                 • Research and Development Economies
                   • Large companies can devote more funds to innovation; discover new products or find easier ways to produce goods
                 • Social and Welfare Economies
                   • Large companies are able to provide social facilities like sports clubs and relaxation areas; these benefits make recruitment easier and improve morale, leading to a more highly motivated workforce with lower levels of absenteeism and a lower rate of labour turnover
                 • Managerial and Administrative Economies
                   • Large companies can employ the best managers and adopt more cost effective administration procedures; this reduces overheads thus improving competitiveness
       • DIFICULTIES INCREASING LABOUR PRODUCTIVITY AND EFFICIENCY
         • It is unlikely land fertility can be increased indefinitely; some modern agricultural techniques are blamed for destroying fertilty rather than increasing it. There are conflicts with environmental objectives too, particularly in factory farming
         • Many resources are not renewable
         • Education and training can improve productivity but consume resources, particularly time; the opportunity cost must be considered when investing in these
         • Increasing the level of investment in capital equipment means resources must be diverted from consumer goods (which immediately can satisfy consumers) to capital goods to create future wealth; too much emphasis on capital goods can mean consumers have fewer products available to them in the short term.
         • Problems that arise from extending scale
           • DISECONOMIES OF SCALE
             • As organisations grow, they may suffer disacvantages that lead to a lowering of efficiency and higher unit costs of production. These are known as DISECONOMIES OF SCALE or INTERNAL DISECONOMIES OF SCALE. Some examples are as follows:
               • Co-ordination diseconomies
                 • Loss of control by management as the organisation becomes more complex
                 • Individuals are less likely to follow organisational policies if level of control is reduced; common in larger organisations due to more levels of hierarchy and managers having larger spans of control
                 • Large firms oftenn have rigid and inflexible policies to limit loss of control (as described) but this reduces the ability to respond quickly to hanging customer needs
               • Communication Disconomies
                 • Too many levels of hierarchy can reduce the effectiveness of communication; messages can be distorted and may not reach everybody
                 • Becomes more difficult for managers to meet with subordinates as spans of control widen
                 • In large firms, inappropriate methods of communication are likely to be used
                 • Employees who are not involved in or do not receive communications may feel unvalued and demotivated
               • Motivation Diseconomies
                 • More difficult to access the needs of many individuals
                 • In large firms there may be less time for recognition and reward
                 • Large hierarchies creates feelings of distance between decision makers and employees
                 • Large firms often have the financial wealth to introduce motivation schemes but can lack the management time to provide recognition
                 • NB. these are only diseconomies of scale if caused by the large size of the organisation, rather than other factors like poor management
               • Other Diseconomies of Scale
                 • Technical diseconomies - production on a very large scale can be difficult to manage
                 • Excessive bereaucracy
                 • Staff problems - industrial relations problems and higher staff turnover and absenses may result from prior factors
                 • Less flexibility (to meet changing needs of their customers)
         • HOW TO CHOOSE THE OPTIMAL MIX OF RESOURCES
           • Factors influencing the choice between capital-intensive and labour-intensive production
             • Methods of Production
               • Mass production on a large scale lends itself to forms who will chose capital-intensive production methods
               • If products are specifically designed for the consumer, labour-intensive methods are more likely
             • Skills and efficiency of the factors of production
               • Dependant on whether capital or labour intensive
             • Relative costs of labour and capital
               • Labour in Western-Europe is far more expensive than other parts of the world
               • Another consideration is the reliability of labour and capital (workers and machinery)
             • Size and Financial position of a business
               • Small firms may not be able to afford capital-intensive methods as capital equipment is expensive to buy so may opt for labour-intensive production
             • Product or service
               • The more standardised a product, the greater the advantages of capital-intensive production as machinery can provide vast quantities at low unit costs
             • Customers
               • Customers tend to prefer a more sociable nature