McKinsey Explainers

What is productivity?
Productivity measures the amount of value created for each hour
that is worked in a society.

May 2024
You probably know that the amount of work you On a country scale, labor productivity is frequently
can get done in one day is your rate of productivity. calculated as a ratio of GDP per total hours worked.
Productivity in economics is pretty much the same So if a country’s GDP were $1 trillion and its people
as productivity at your desk. But for companies or worked 20 billion hours to create that value, the
even countries, measuring productivity is a little country’s labor productivity would be $50 per hour.
more complex than how fast you cleared your Labor productivity growth is crucial to increased
inbox today. wages and standards of living, and it helps increase
consumers’ purchasing power.
On a country scale, productivity can mean the
difference between good and not-so-good
standards of living. The only way people in a What is productivity in economics?
country can achieve a higher standard of living is We’ve touched on labor productivity, but
through productivity growth. For a company, economists measure other types of productivity,
productivity can determine whether it can afford to too. Capital productivity is a measure of how well
increase wages for its employees or even if it can physical capital—such as real estate, equipment,
continue operating. Stagnating or contracting and inventory—is used to generate output such as
productivity can spell serious trouble ahead for goods and services. (Capital productivity and labor
individuals, organizations, and nations alike. productivity are frequently considered together as
an indicator of a country’s overall standard of living.)
To maintain or increase productivity, we need to Total factor productivity is the portion of growth in
first understand what it is and how it works. Here, output not explained by growth in labor or capital.
we’ll take a deep dive into the theory and practice This type of productivity is sometimes called
of productivity. “innovation-led growth.”

Explore “What is economic growth?” from

McKinsey Explainers for even more on Is productivity accelerating or
macroeconomics and growth, and where slowing down?
productivity fits into the bigger picture. The past 25 years have been a major success story
for global productivity. These gains have largely
been driven by China and India: from 1997 to 2022,
How is productivity calculated?
China took its output from $6,000 per worker to
Productivity is a measure of output relative to input. $40,000. Median economy productivity has jumped
Labor productivity is the most common productivity sixfold. Thirty emerging economies, home to 3.6
measure—it’s defined as economic output (gross billion people, are in the “fast lane” of improvement;
domestic product, or GDP) per hour worked. Labor if they maintain this pace, they will converge to
productivity is typically the biggest determinant of advanced-economy productivity levels within about
economic and wage growth in the long term. And 25 years.
over time, labor productivity and real wages are
closely—though not exactly—linked.

What is productivity? 2
But despite this meteoric growth in some McKinsey Global Institute research on the future of
economies, productivity growth has slowed overall productivity and growth after the COVID-19 crisis,
since the global financial crisis in 2008. Labor which focused on the United States and Europe,
productivity growth has been declining in the found that companies’ responses to the pandemic
United States and Western Europe since a boom in could exacerbate long-run structural drags on
the 1960s. demand. It’s notable that about 60 percent of
estimated productivity potential comes from
Two factors account for a productivity slowdown in companies prioritizing efficiency over output
Japan, the United States, Western Europe, and growth—through automation, for instance. If
other advanced economies. First, in the lead-up to productivity gains aren’t reinvested in growth that
the 2008 global financial crisis, manufacturing, drives jobs and incomes, we risk a widening
primarily in the electronics industry, experienced inequality gap. Fast reskilling is key to avoiding this,
waves of productivity advances, which have slowly as it can help people whose jobs have been
faded in the years since. Second, there has been automated move on to another job or career
an overall decline since the 2008 crisis in capital quickly. If that new job is more productive than the
investment across multiple sectors, likely due last one—which is often the case—that worker is
to a decrease in demand and ongoing turning a “threat” (the lost job) into an opportunity
macroeconomic uncertainty. and a boost in productivity for themselves and
the economy.

Why is productivity so important?

Increased productivity is needed if we are to meet How can productivity be increased?
the dual existential challenges of the 21st century: Two factors typically drive labor productivity. The
closing the empowerment gap and achieving net first is the amount of capital per worker. Capital can
zero. According to McKinsey Global Institute be something tangible, like machines or
research, closing these gaps will require the infrastructure, or intangible, like software. For
equivalent of 8 percent of global GDP annually, example, an office worker is more productive with a
which will be very hard to achieve without rapid laptop than without one, and a construction worker
productivity growth. is more productive with a crane. The second factor
is human capital: the education, abilities, and
What’s more, the unprecedented economic growth accumulated experience of working people.
of the past 50 years—during which time the world
economy expanded sixfold and average per capita Investment, both public and private, is critical for
income almost tripled—will slow dramatically if productivity growth. Higher investment is
productivity doesn’t improve. That’s because associated with greater output, lower inflation, and
population growth is slowing, which means the lower poverty rates and inequality. Policy can help
labor force is shrinking relative to the overall set strong and stable incentives for private
population. If there are fewer overall workers investment. Growth in capital per worker accounted
contributing to the economy, each worker’s for about 80 percent of productivity growth in most
productivity will have to increase for GDP growth emerging regions over the past 25 years.
to stay on track.

What is productivity? 3
Looking ahead, digitization and other technological faced with intensifying international competition,
advances could add up to one percentage point to companies that coupled capital and technology
annual productivity growth in advanced economies. investments with capability and changes in
And early adoption of recent advances such as gen management practices saw their productivity
AI could add an extra boost of more than half a soar—which in turn lifted the entire economy.
percentage point across advanced—and several
emerging—economies, too. There are signs that The same economic uplift is possible in the current
emerging AI applications could boost productivity climate if business leaders can deliver productivity
faster than previous technologies; several proven growth. Here are three ways business leaders can
productivity-enhancing use cases have already unlock their productivity potential:
emerged, including software engineering for
corporate IT and product development, sales, — Modernize operating models. Leaders who
marketing, customer operations, product R&D, and embrace resource reallocation and a
many more. technology-forward culture improve their
chances of achieving operational goals.

What about productivity at work? — Multiply the impact of frontline production and
How can business leaders drive delivery. The front line is where the battle for
productivity in their organizations? efficiency and value creation is won or lost.
There’s no denying that these are times of Organizations that deliver sustained productivity
uncertainty. Geopolitical disruptions are mounting, increases pay careful attention to their balance
and the global economic order is shifting beneath sheets and maximize their return on talent
our feet. Meanwhile, our challenges are greater investment.
than ever: in coming years, the global community
must deliver the connected goals of closing the — Accelerate top-line growth by raising the value
empowerment gap and achieving net zero. of existing and new market offerings.
Successful innovation is essential to driving the
What steps can business leaders take to help their value of existing and new offerings. Innovative
companies unlock productivity in these times? New growers put growth at the center of strategic
McKinsey research points to a three-sided and financial discussions and commit significant
productivity opportunity: upskilling workers and financial resources to innovation.
changing how their organizations operate; striving
to offset higher input prices and interest rates; and
better targeting investments in capital and How can new AI tools catalyze
technology (exhibit). productivity?
The point of technology is to help us get things
Why is this cocktail of jobs, corporate value, done faster and with less effort. This in turn means
technological advances, and economic growth the giving more to consumers for less, which leads to
right aspiration for our times? These four elements increasing social welfare. You might assume,
delivered the last great productivity acceleration in therefore, that increased technological innovation
the United States, between 1995 and 2000. When would mean increased productivity. That’s exactly

What is productivity? 4
what happened in the 1990s, when a revolution in McKinsey estimates that gen AI’s impact on
information and communications technology productivity could add trillions of dollars in value to
sparked a boom in productivity. the global economy—up to $4.4 trillion annually
across 63 use cases we analyzed. Around 75 percent
But that hasn’t been the case more recently: of that value would fall across four areas: customer
technology has continued to develop but productivity operations, marketing and sales, software
growth remains sluggish. According to analysis by engineering, and research and development. But to
the McKinsey Global Institute, this disconnect is the achieve the labor productivity boost gen AI makes
result of three waves that collided in the aftermath possible—to the tune of up to 0.6 percent annually
of the 2008 financial crisis: waning of the 1990s through 2040—organizations will need to rapidly
productivity boom; financial crisis aftereffects, adopt the technology and efficiently redeploy
including weak demand and uncertainty; and worker time into other activities.
digitization, which culminated in the explosion of
gen AI tools beginning in late 2022.

Exhibit

What is productivity? 5
What is the productivity outlook for 25 percent. But demographics are changing.
by region? Without productivity growth, Latin America’s
aging population could trigger a regional
— Europe. Europe leads the world in sustainability
slowdown. Investment and innovation could
and inclusion: European countries are global
raise productivity, boost private and
leaders in carbon emissions and boast the
public income, and build capital to enable
lowest income inequality and highest life
further growth.
expectancy. Europe’s challenge in the years
ahead will be to bolster the growth part of the
equation. At present, European corporations lag — Asia. The Asian economies with the highest
productivity are the rapidly aging societies of
behind their American counterparts on scale
the Pacific Rim. By 2050, up to 34 percent of
and performance. Recent years have also
high-productivity parts of Asia, including China,
exposed new frailties, including Europe’s
Hong Kong, Japan, Singapore, and South
energy import dependencies and its supply
Korea, will have elderly populations. To avoid a
chains’ sensitivity to geopolitical conflict. To
slowdown, and to lift more Asians out of
boost growth, European companies could aim
poverty, Asian stakeholders will need to shift
to increase their R&D budgets with the goal of
value chains and significantly boost productivity
winning a share in new areas of competition,
elsewhere, including through automation.
such as autonomous driving or AI in healthcare.
European policy makers could also make steps
India has serious growth aspirations in the coming
to strengthen supply chains and diversify
decades, including 600 million jobs created,
energy sources.
income rising sixfold to over $12,000 per capita,
and GDP growing to $19 trillion. Impressively,
— Africa. Despite a few difficult years of growth,
between 2012 and 2022, one in every five
Africa’s rich natural resources and young and
Indian companies was able to double its
growing population provide opportunities to
revenue every five years and quadruple it in ten.
establish productivity as the foundation of
This extraordinary growth rate has the potential
economic growth in the 21st century and
to act as a GDP growth catalyst.
beyond. Certain African countries, cities,
sectors, and companies have charted a course
toward productivity that others can use as a
— The United States. Since 2005, US labor
guide. Increasing digitization, developing talent,
productivity has grown at a lackluster
collaborating more regionally, supporting more
1.4 percent. More recently, the United States
business champions, and building green
has seen an uptick in productivity growth,
business are some of the ways African
although it’s too soon to say whether this
stakeholders can increase productivity.
trend will have staying power over the long
term. Regaining a long-term productivity
— Latin America. Between 2000 and 2019,
growth rate of 2.2 percent annually could
people entering the workforce accounted for
mean a $10 trillion increase in US GDP by
approximately 75 percent of Latin America’s
2030. Achieving productivity gains to this
GDP growth, while productivity gains accounted
extent will require unlocking the power of

What is productivity? 6
 existing technology, investing in intangibles, — “Yes, you can measure software developer
improving workforce reskilling and labor productivity,” August 17, 2023, Chandra
mobility, and implementing place-based Gnanasambandam, Martin Harrysson, Alharith
approaches tuned to specific geographies. Hussin, Jason Keovichit, and Shivam Srivastava

For a more in-depth exploration of these topics, — “What could a new era mean for Latin America?,”
see McKinsey’s Productivity and Prosperity July 20, 2023, Andres Cadena, Olivia White,
collection. Learn more about the McKinsey Global and Camillo Lamanna
Institute—and check out job opportunities with
McKinsey Global Institute if you’re interested in — “The economic potential of generative AI: The
working at McKinsey. next productivity frontier,” June 14, 2023,
Michael Chui, Eric Hazan, Roger Roberts, Alex
Articles referenced: Singla, Kate Smaje, Alex Sukharevsky, Lareina
Yee, and Rodney Zemmel
— “Investing in productivity growth,” March 27,
2024, Jan Mischke, Chris Bradley, Marc Canal, — “Reimagining economic growth in Africa:
Olivia White, Sven Smit, and Denitsa Georgieva Turning diversity into opportunity,” June 5,
2023, Mayowa Kuyoro, Acha Leke, Olivia White,
— “The human side of generative AI: Creating a Lola Woetzel, Kartik Jayaram, and Kendyll Hicks
path to productivity,” March 18, 2024, Aaron De
Smet, Sandra Durth, Bryan Hancock, Marino — “How to revive US productivity,” May 23, 2023,
Mugayar-Baldocchi, and Angelika Reich Charles Atkins and Olivia White

— “Achieving extraordinary growth: Myths and — “Rekindling US productivity for a new era,”
realities,” February 19, 2024, Jaidit Brar, February 16, 2023, Charles Atkins, Olivia White,
Raunak Shah, and Shivanand Sinha Asutosh Padhi, Kweilin Ellingrud, Anu
Madgavkar, and Michael Neary
— “Accelerating Europe: Competitiveness for a
new era,” January 16, 2024, Massimo Giordano, — “Getting tangible about intangibles: The future
Solveigh Hieronimus, Sven Smit, Marc-Antoine of growth and productivity?,” June 16, 2021, Eric
de la Chevasnerie, Jan Mischke, Efi Koulouridi, Hazan, Sven Smit, Jonathan Woetzel, Biljana
Guillaume Dagorret, and Nicole Brunetti Cvetanovski, Mekala Krishnan, Brian Gregg,
Jesko Perrey, and Klemens Hjartar
— “2024 and beyond: Will it be economic
stagnation or the advent of productivity-driven — “Will productivity and growth return after the
abundance?,” January 12, 2024, Ezra Greenberg, COVID-19 crisis?,” March 30, 2021, Jan Mischke,
Asutosh Padhi, and Sven Smit Jonathan Woetzel, Sven Smit, James Manyika,
Michael Birshan, Eckart Windhagen, Jörg
— “Asia on the cusp of a new era,” September 22, Schubert, Solveigh Hieronimus, Guillaume
2023, Jeongmin Seong, Chris Bradley, Nick Dagorret, and Marc Canal Noguer
Leung, Lola Woetzel, Kweilin Ellingrud, Gautam
Kumra, and Peixi Wang

What is productivity? 7
— “Will productivity and growth return? An author — “Moving Saudi Arabia’s economy beyond oil,”
of our new McKinsey Global Institute research December 1, 2015, Ghassan Al-Kibsi, Jonathan
discusses,” March 30, 2021, Marc Canal Noguer Woetzel, Tom Isherwood, Jawad Khan, Jan
Mischke, and Hassan Noura
— “Solving the productivity puzzle,” February 20,
2018, Jaana Remes, James Manyika, Jacques This article was updated in May 2024; it was
Bughin, Jonathan Woetzel, Jan Mischke, and originally published in February 2023.
Mekala Krishnan

Get to know and directly engage with senior McKinsey experts on productivity.
Acha Leke is a senior partner in McKinsey’s Johannesburg office; Alex Singla and Asutosh Padhi are
senior partners in the Chicago office; Alexander Sukharevsky and Kate Smaje are senior partners in the
London office; Andres Cadena is a senior partner in the Bogotá office; Chris Bradley is a director of the
McKinsey Global Institute (MGI) and a senior partner in the Sydney office; Eric Hazan is a senior partner in
the Paris office; Gautam Kumra is a senior partner in the Singapore office; Kartik Jayaram is a senior
partner in the Nairobi office; Kweilin Ellingrud is a director of MGI and a senior partner in the Minneapolis
office; Lareina Yee and Olivia White, a director of MGI, are senior partners in the Bay Area office;
Massimo Giordano is a senior partner in the Milan office; Nick Leung is a senior partner in the Hong
Kong office; Rodney Zemmel is a senior partner in the New York office; Solveigh Hieronimus is a senior
partner in the Munich office; and Sven Smit is chair of MGI and a senior partner in the Amsterdam office.

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What is productivity? 8