Chiral drugs

From Wikipedia, the free encyclopedia

https://en.wikipedia.org/wiki/Chiral_drugs 

Chemical compounds that come as mirror-image pairs are referred to by chemists as chiral or handed molecules. Each twin is called an enantiomer. Drugs that exhibit handedness are referred to as chiral drugs. Chiral drugs that are equimolar (1:1) mixture of enantiomers are called racemic drugs and these are obviously devoid of optical rotation. The most commonly encountered stereogenic unit, that confers chirality to drug molecules are stereogenic center. Stereogenic center can be due to the presence of tetrahedral tetra coordinate atoms (C,N,P) and pyramidal tricoordinate atoms (N,S). The word chiral describes the three-dimensional architecture of the molecule and does not reveal the stereochemical composition. Hence "chiral drug" does not say whether the drug is racemic (racemic drug), single enantiomer (chiral specific drug) or some other combination of stereoisomers. To resolve this issue Joseph Gal introduced a new term called unichiral. Unichiral indicates that the stereochemical composition of a chiral drug is homogenous consisting of a single enantiomer.

Many medicinal agents important to life are combinations of mirror-image twins. Despite the close resemblance of such twins, the differences in their biological properties can be profound. In other words, the component enantiomers of a racemic chiral drug may differ wildly in their pharmacokinetic, pharmacodynamic profile. The tragedy of thalidomide illustrates the potential for extreme consequences resulting from the administration of a racemate drug that exhibits multiple effects attributable to individual enantiomers. With the advancements in chiral technology and the increased awareness about three-dimensional consequences of drug action and disposition emerged specialized field "chiral pharmacology". Simultaneously the chirality nomenclature system also evolved. A brief overview of chirality history and terminology/descriptors is given below. A detailed chirality timeline is not the focus of this article.

Chirality: history overview

Louis Pasteur - pioneering stereochemist

Chirality can be traced back to 1812, when physicist Jean-Baptiste Biot found out about a phenomenon called "optical activity." Louis Pasteur, a famous student of Biot's, made a series of observations that led him to suggest that the optical activity of some substances is caused by their molecular asymmetry, which makes nonsuperimposable mirror-images. In 1848, Pasteur grew two different kinds of crystals from the racemic sodium ammonium salt of tartaric acid. He was the first person to separate enantiomeric crystals by hand. In fact Pasteur laid the foundations of stereochemistry and chirality.

In 1874, Jacobus Henricus van 't Hoff came up with the idea of an asymmetric carbon atom. He said that all optically active carbon compounds have an asymmetric carbon atom. In the same year, Joseph Achille Le Bel only used asymmetry arguments and talked about the asymmetry of the molecules as a whole instead of the asymmetry of each carbon atom. So, Le Bel's idea could be seen as the general theory of stereoisomerism, while van 't Hoff's could be seen as a special case (restricted to tetrahedral carbon).

Soon, scientists started to look into what chiral compounds meant for living things. In 1903, Cushny was the first person to show that enantiomers of a chiral molecule have different biological effects. Lord Kelvin was the first person to use the word "chiral." He did this in 1904.

Chirality: terminology/descriptors

This is to give an overview of the evolving chirality nomenclature system commonly employed to distinguish enantiomers of a chiral drug. In the beginning, enantiomers were distinguished based on their ability to rotate the plane of plane-polarized light. The enantiomer that rotates the plane-polarized light to the right is named "dextro-rotatory", abbreviated as "dextro" or "d" and the counterpart as "levo" or "l". A racemic mixture is denoted as "(±)", "rac", or "dl". Now the d/l system of naming based on optical rotation is falling into disuse.

Later, the Fischer convention was introduced to specify the configuration of a stereogenic center and uses the symbols D and L. The use of capital letters is to differentiate from the "d" / "l" notation (optical descriptor) described earlier. In this system, the enantiomers are named with reference to D- and L-glyceraldehyde which is taken as the standard for comparison. The structure of the chiral molecule should be represented in the Fischer projection formula. If the hydroxyl group attached to the highest chiral carbon is on the right-hand side it is referred to as D-series and if on the left-hand side it is called L-series. This nomenclature system has also become obsolete. But D-/L-system of naming is still employed to designate the configuration of amino acids and sugars. In general the D/L system of nomenclature is superseded by the Cahn-Ingold-Prelog (CIP) rule to describe the configuration of a stereogenic/chiral center.

In the CIP or R/S convention, or sequence rule, the configuration, spatial arrangements of ligands/substituents around a chiral center, is labeled as either "R" or "S". This convention is now almost worldwide in use and become a part of the IUPAC (International Union of Pure and Applied Chemistry) rules of nomenclature. In this approach: identify the chiral center, label the four atoms directly attached to the stereogenic center in question, assign priorities according to the sequence rule ( from 1 to 4), rotate the molecule until the lowest priority (number 4) substituent is away from the observer/viewer, draw a curve from number 1 to number 2 to number 3 substituent. If the curve is clockwise, the chiral center is of R-absolute configuration, "R" (Latin, rectus = right). If the curve is counterclockwise, the chiral center is of S-absolute configuration, "S" (Latin, sinister = left). Refer to figure, the Cahn-Ingold-Prelog rule.

The Cahn-Ingold-Prelog rule

An overview of the nomenclature system is presented in the table below.

Chirality descriptor (used as prefix)	Description	Comments
(+)- / dextro-/ d-	Optical rotation signs; does not reflect the configuration	d; Obsolete terms/falling in disuse
(-)- / levo-	Optical rotation signs; does not reflect the configuration	l; Obsolete terms/falling in disuse
(±)- / rac- / dl-	Racemate or racemic mixture is an equimolar (1:1) mixture of enantiomers; corresponds to the enantiomeric excess of 0%.	dl; Obsolete terms/falling in disuse
D-	Relative configuration with respect to D-glyceraldehyde; referred to as Fischer convention	-
L-	Relative configuration with respect to L-glyceraldehyde; referred to as Fischer convention	-
R-	Latin: rectus = right; absolute configuration as per Cahn-Ingold-Prelog rule/sequence rule	-
S-	Latin: sinister = left; absolute configuration as per Cahn-Ingold-Prelog rule/Sequence rule	-

Racemic drugs

For many years scientists in drug development have been blind to the three-dimensional consequences of stereochemistry, chiefly due to the lack of technology for making enantioselective investigations. Besides, the thalidomide tragedy, another event that raised the importance of issues of stereochemistry in drug research and development was the publication of a manuscript in 1984 entitled, "Stereochemistry, a basis of sophisticated nonsense in pharmacokinetics and clinical pharmacology" by Ariëns. This article and series of articles that followed, criticized the practice of conducting pharmacokinetic and pharmacodynamic studies on racemic drugs and ignoring the separate contributions of the individual enantiomers. These papers have served to crystallize some of the important issues surrounding racemic drugs and stimulated much discussion in industry, government and academia.

Chiral pharmacology

As a result of these criticisms and the renewed awareness of the three-dimensional effects of drug action fueled by the exponential explosion of chiral technology emerged the new area "stereo-pharmacology". A more specific term is "chiral pharmacology", a phrase popularized by John Caldwell. This field has grown itself into a specialized discipline concerned with the three-dimensional aspects of drug action and disposition. This approach essentially views each version of the chiral twins as separate chemical species. To express the pharmacological activities of each of the chiral twins two technical terms have been coined, eutomer and distomer. The member of the chiral twin that has greater physiological activity is referred to as the eutomer and the other one with lesser activity is referred to as distomer. It is generally understood that this reference is necessarily to a single activity being studied. The eutomer for one effect may well be the distomer when another is studied. The eutomer/distomer ratio is called the eudysmic ratio.

Bio-environment and chiral twins

The behavior of the chiral twins depends mainly on the nature of the environment (achiral/chiral) in which they are present. An achiral environment does not differentiate the molecular twins whereas a chiral environment does distinguish the left-handed version from the right-handed version. Human body, a classic bio-environment, is inherently handed as it is filled with chiral discriminators like amino acids, enzymes, carbohydrates, lipids, nucleic acids, etc. Hence when a racemic therapeutic gets exposed to biological system the component enantiomers will be acted upon stereoselectively. For drugs, chiral discrimination can take place either in the pharmacokinetic or pharmacodynamic phase.

Chiral discrimination

Easson and Stedman (1933) advanced a drug-receptor interaction model to account for the differential pharmacodynamic activity between enantiomeric pairs. In this model the more active enantiomer (the eutomer) take part in a minimum of three simultaneous intermolecular interactions with the receptor surface (good fit), Figure. A., where as the less active enantiomer (distomer) interacts at two sites only (bad fit), Figure B. [Refer image for Figure: Easson-Stedman model]. Thus the "fit" of the individual enantiomers to the receptor site differs, as does the energy of interaction. This is a simplistic model but used to explain the biological discrimination between enantiomeric pairs.

Easson-Stedman model

In reality the drug-receptor interaction is not that simple, but this view of such complex phenomenon has provided major insights into the mechanism of action of drugs.

Pharmacodynamic considerations

Racemic drugs are not drug combinations in the accepted sense of two or more co-formulated therapeutic agents, but combinations of isomeric substances whose pharmacological activity may reside predominantly in one specific enantiomeric form. In case of stereoselectivity in action only one of the components in the racemic mixture is truly active. The other isomer, the distomer, should be regarded as impurity or isomeric ballast, a term coined by Ariëns, not contributing to the effects aimed at. In contrast to the pharmacokinetic properties of an enantiomeric pair, differences in pharmacodynamic activity tend to be more obvious. There is a wide spectrum of possibilities of distomer actions, many of which are confirmed experimentally. Selected examples of the distomer actions (viz. equipotent, less active, inactive, antagonistic, chiral inversion) are presented in the table below.

Chiral drug	Stereogenic center(s)	Therapeutic action	Eutomer	Distomer	Distomer action
promethazine	1	Antihistaminic	(R)-/(S)-	-	Equipotent
Salbutamol	1	Bronchodilator	(R)-	(S)-	Less active; no serious side-effects
Propranolol	1	Antihypertensive	(S)-	(R)-	Inactive; half placebo
Indacrinone	1	Diuretic	(R)-	(S)-	Antagonizes side effect of the eutomer
Propoxyphene	2	Analgesic; (Dexpropoxyphene)	(2R),(3S)-	(2S),(3R)-	Independent therapeutic value
		Antitussive; (Levopropoxyphene)	(2S),(3R)-	(2R),(3S)-
Ibuprofen	1	Anti-inflammatory	(S)-	(R)-	Chiral inversion (unidirectional; [(R)- to (S)-]

Drug toxicity

Since there is a frequent large pharmacokinetic and pharmacodynamic differences between enantiomers of a chiral drug it is not surprising that enantiomers may result in stereoselective toxicity. They can reside in the pharmacologically active enantiomer (eutomer) or in the inactive one (distomer). The toxicologic differences between enantiomers of have also been demonstrated. The following are examples of some of the chiral drugs where their toxic/undesirable side-effects dwell almost in the distomer. This would seem to be a clear cut case of going for a chiral switch.

Penicillamine

Penicillamine enantiomers

Penicillamine is a chiral drug with one chiral center and exists as a pair of enantiomers. (S)-penicillamine is the eutomer with the desired antiarthritic activity while the (R)-penicillamine is extremely toxic.

Ketamine

Ketamine enantiomers

Ketamine is a widely used anaesthetic agent. It is a chiral molecule that is administered as a racemate. Studies show that (S)-(+)-ketamine is the active anaesthetic and the undesired side-effects (hallucination and agitation) reside in the distomer, (R)-(-)-ketamine.

Dopa

Dopa enantiomers

The initial use of racemic dopa for the treatment of Parkinson's disease resulted in a number of adverse effects viz. nausea, vomiting, anorexia, involuntary movements and granulocytopenia. The use of L-dopa [the (S)-enantiomer] resulted in reducing the required dose, and adverse effects. The granulocytopenia was not observed with the single enantiomer.

Ethambutol

Ethambutol enantiomers

The antitubercular agent Ethambutol contains two constitutionally symmetrical stereogenic centers in its structure and exists in three stereoisomeric forms. An enantiomeric pair (S,S)- and (R,R)-ethmabutol, along with the achiral stereoisomer called meso-form, it holds a diastereomeric relationship with the optically active stereoisomers. The activity of the drug resides in the (S,S)-enantiomer which is 500 and 12 fold more potent than the (R,R)-ethmabutol and the meso-form. The drug s initially introduced for clinical use as the racemate and was changed to the (S,S)-enantiomer, as a result of optic neuritis leading to blindness. Toxicity is related to both dose and duration of treatment. All the three stereoisomers were almost equipotent with respect to side effects. Hence the use of S,S)-enantiomer greatly enhanced the risk/benefit ratio.

Thalidomide

Thalidomide enantiomers

Thalidomide is a classical example highlighting the alleged role of chirality in drug toxicity. Thalidomide was a racemic therapeutic and prescribed to pregnant women to control nausea and vomiting. The drug was withdrawn from world market when it became evident that the use in pregnancy causes phocomelia (clinical conditions where babies are born with deformed hand and limbs). Later in late 1970s studies indicated that the (R)- enantiomer is an effective sedative, the (S)-enantiomer harbors teratogenic effect and causes fetal abnormalities. Later studies established that under biological conditions the (R)-thalidomide, good partner, undergoes an in vivo metabolic inversion to the (S)-thalidomide, evil partner and vice versa. It is a bidirectional chiral inversion. Hence the argument that the thalidomide tragedy could have been avoided by using a single enantiomer is ambiguous and pointless.

The salient features are presented in the table below.

Chiral drugs: Adverse effects residing in the distomer

Chiral drug	Chiral centers	Clinical effects
		Eutomer; Activity	Distomer; Activity
Penicillamine	1	(S)-; Antiarthritic	(R)-; Mutagen
Ketamine	1	(S)-; Anesthetic	(R)-; Hallucinogen
Dopa	1	(S)-; Antiparkinson	(R)-; Granulocytopenia
Ethambutol	2	(S,S)-; Tuberculostatic	(R,R)-; and meso- form; Blindness
Thalidomide	1	(R)-; Sedative	(S)-; Teratogenic

Unichiral drugs

Unichiral indicates configurationally homogeneous substance (i.e. made up of chiral molecules of one and the same configuration). Other commonly used synonyms are enantiopure drugs and enantiomerically pure drugs. Monochiral drugs has also been suggested as another synonym. Professor Eliel, Wilen, and Gal expressed their deep concern over the misuse of the term "homochiral" in articles to denote enantiomerically pure drugs, which is incorrect. Homochiral means objects or molecules of the same handedness. Hence should be used only for comparison of two or more objects of like "chirality". For instance, left hands of different individuals, or say R-naproxen and R-ibuprofen.

Globally drug companies and regulatory agencies have an inclination towards the development of unichiral drugs as a consequence of the increased understanding of the differing biological properties of individual enantiomers of a racemic therapeutics. Most of these unichiral drugs are the consequence of chiral switch approach. The table below list selected unichiral drugs used in drug therapy.

Unichiral drugs employed in drug therapy

Unichiral drugs	Drug class/ Type of medication	Therapeutic area
Esomeprazole	Proton pump inhibitor	Gastroenterology
S-pantoprazole	Proton pump inhibitor
Dexrabiprazole	Proton pump inhibitor
Levosalbutamol	Bronchodilator	Pulmonology
Levocetrizine	Antihistaminic
Levofloxacin	Antibacterial	Infectious diseases
S-penicillamine	Rheumatoid Arthritis	Rheumatology / Pain/ Inflammation
S-etodolac	NSAID
Dexketoprofen	NSAID
S-ketamine	Anesthetic	Anesthesiology
Levobupivacaine	Local anesthetic
Levothyroxine	Anti-hypothyroidism	Endocrinology
Levodopa	Anti-Parkinson	Neuropsychiatry
S-amlodipine	Antianginal / Antihypertensive	Cardiology
S-metoprolol	Antihypertensive
S-atenolol	Antihypertensive

A company may go in for developing a racemic drug against an enantiomer by providing adequate reasoning. The rationale why a company might pursue developing racemic drugs could include expensive separation of enantiomers, eutomer racemizes in solution (e.g. oxazepam), activities of the enantiomeric pair are different but supplementary, distomer is inactive, but separation is exorbitant. Insignificant/low toxicity of the distomer, high therapeutic index, mutually beneficial, pharmacological activities of both the enantiomers, and if the development of an enantiomer takes huge amount of time for a drug of emergency need e.g., cancer, AIDS, etc.

Chiral purity

Chiral purity is a measure of the purity of a chiral drug. Other synonyms employed include enantiomeric excess, enantiomer purity, enantiomeric purity, and optical purity. Optical purity is an obsolete term since today most of the chiral purity measurements are done using chromatographic techniques (not based on optical principles). Enantiomeric excess tells the extent (in %) to which the chiral substance contains one enantiomer over the other. For a racemic drug the enantiomeric excess will be 0%. There are number of chiral analysis tools such as polarimetry, NMR spectroscopy with the use of chiral shift reagents, chiral GC (gas chromatography), chiral HPLC (high performance liquid chromatography) and other chiral chromatographic techniques, that are employed to evaluate chiral purity. Assessing the purity of a unichiral drug or enantiopure drug is of great importance from a drug safety and efficacy perspective.

Employment

From Wikipedia, the free encyclopedia

https://en.wikipedia.org/wiki/Employment 

Employment is a relationship between two parties regulating the provision of paid labour services. Usually based on a contract, one party, the employer, which might be a corporation, a not-for-profit organization, a co-operative, or any other entity, pays the other, the employee, in return for carrying out assigned work. Employees work in return for wages, which can be paid on the basis of an hourly rate, by piecework or an annual salary, depending on the type of work an employee does, the prevailing conditions of the sector and the bargaining power between the parties. Employees in some sectors may receive gratuities, bonus payments or stock options. In some types of employment, employees may receive benefits in addition to payment. Benefits may include health insurance, housing, disability insurance. Employment is typically governed by employment laws, organisation or legal contracts.

Employees and employers

Not to be confused with Supervisor.

Further information: List of largest employers, List of professions, and Tradesman

An employee contributes labour and expertise to an endeavor of an employer or of a person conducting a business or undertaking (PCB) and is usually hired to perform specific duties which are packaged into a job. In a corporate context, an employee is a person who is hired to provide services to a company on a regular basis in exchange for compensation and who does not provide these services as part of an independent business.

Independent contractor

This section is about the classification in general. For other uses, see Independent contractor (disambiguation).

An issue that arises in most companies, especially the ones that are in the gig economy, is the classification of workers. A lot of workers that fulfill gigs are often hired as independent contractors.

To categorize a worker as an independent contractor rather than an employee, an independent contractor must agree with the client on what the finished work product will be and then the contractor controls the means and manner of achieving the desired outcome. Secondly, an independent contractor offers services to the public at large, not just to one business, and is responsible for disbursing payments from the client, paying unreimbursed expenses, and providing his or her own tools to complete the job. Third, the relationship of the parties is often evidenced by a written agreement that specifies that the worker is an independent contractor and is not entitled to employee benefits; the services provided by the worker are not key to the business; and the relationship is not permanent.

As a general principle of employment law, in the United States, there is a difference between an agent and an independent contractor. The default status of a worker is an employee unless specific guidelines are met, which can be determined by the ABC test. Thus, clarifying whether someone who performs work is an independent contractor or an employee from the beginning, and treating them accordingly, can save a company from trouble later on.

Provided key circumstances, including ones such as that the worker is paid regularly, follows set hours of work, is supplied with tools from the employer, is closely monitored by the employer, acting on behalf of the employer, only works for one employer at a time, they are considered an employee, and the employer will generally be liable for their actions and be obliged to give them benefits. Similarly, the employer is the owner of any invention created by an employee “hired to invent,” even in the absence of an assignment of inventions. In contrast, a company commissioning a work by an independent contractor will not own the copyright unless the company secures either a written contract stating that it is a “work made for hire” or a written assignment of the copyright. In order to stay protected and avoid lawsuits, an employer has to be aware of that distinction.

Employer–worker relationship

Employer and managerial control within an organization rests at many levels and has important implications for staff and productivity alike, with control forming the fundamental link between desired outcomes and actual processes. Employers must balance interests such as decreasing wage constraints with a maximization of labor productivity in order to achieve a profitable and productive employment relationship.

Labor acquisition / hiring

Further information: Application for employment

The main ways for employers to find workers and for people to find employers are via jobs listings in newspapers (via classified advertising) and online, also called job boards. Employers and job seekers also often find each other via professional recruitment consultants which receive a commission from the employer to find, screen and select suitable candidates. However, a study has shown that such consultants may not be reliable when they fail to use established principles in selecting employees. A more traditional approach is with a "Help Wanted" sign in the establishment (usually hung on a window or door or placed on a store counter). Evaluating different employees can be quite laborious but setting up different techniques to analyze their skills to measure their talents within the field can be best through assessments. Employer and potential employee commonly take the additional step of getting to know each other through the process of a job interview.

Training and development

Wiki-training with employees of Regional Institute of Culture in Katowice 02

Training and development refers to the employer's effort to equip a newly hired employee with the necessary skills to perform at the job, and to help the employee grow within the organization. An appropriate level of training and development helps to improve employee's job satisfaction.

Remuneration

There are many ways that employees are paid, including by hourly wages, by piecework, by yearly salary, or by gratuities (with the latter often being combined with another form of payment). In sales jobs and real estate positions, the employee may be paid a commission, a percentage of the value of the goods or services that they have sold. In some fields and professions (e.g., executive jobs), employees may be eligible for a bonus if they meet certain targets. Some executives and employees may be paid in shares or stock options, a compensation approach that has the added benefit, from the company's point of view, of helping to align the interests of the compensated individual with the performance of the company.

Under the faithless servant doctrine, a doctrine under the laws of a number of states in the United States, and most notably New York State law, an employee who acts unfaithfully towards his employer must forfeit all of the compensation he received during the period of his disloyalty.

Employee benefits

Employee benefits are various non-wage compensation provided to employees in addition to their wages or salaries. The benefits can include: housing (employer-provided or employer-paid), group insurance (health, dental, life etc.), disability income protection, retirement benefits, daycare, tuition reimbursement, sick leave, vacation (paid and non-paid), social security, profit sharing, funding of education, and other specialized benefits. In some cases, such as with workers employed in remote or isolated regions, the benefits may include meals. Employee benefits can improve the relationship between employee and employer and lowers staff turnover.

Organizational justice

Organizational justice is an employee's perception and judgement of employer's treatment in the context of fairness or justice. The resulting actions to influence the employee-employer relationship is also a part of organizational justice.

Workforce organizing

Employees can organize into trade or labor unions, which represent the workforce to collectively bargain with the management of organizations about working, and contractual conditions and services.

Ending employment

Usually, either an employee or employer may end the relationship at any time, often subject to a certain notice period. This is referred to as at-will employment. The contract between the two parties specifies the responsibilities of each when ending the relationship and may include requirements such as notice periods, severance pay, and security measures. A contract forbidding an employee from leaving their employment, under penalty of a surety bond, is referred to as an employment bond. In some professions, notably teaching, civil servants, university professors, and some orchestra jobs, some employees may have tenure, which means that they cannot be dismissed at will. Another type of termination is a layoff.

Wage labor

Main article: Wage labor

 

Worker assembling rebar for a water treatment plant in Mazatlan, Sinaloa, Mexico.

Wage labor is the socioeconomic relationship between a worker and an employer, where the worker sells their labor under a formal or informal employment contract. These transactions usually occur in a labor market where wages are market-determined. In exchange for the wages paid, the work product generally becomes the undifferentiated property of the employer, except for special cases such as the vesting of intellectual property patents in the United States where patent rights are usually vested in the original personal inventor. A wage laborer is a person whose primary means of income is from the selling of his or her labor in this way.

In modern mixed economies such as that of the OECD countries, it is currently the dominant form of work arrangement. Although most work occurs following this structure, the wage work arrangements of CEOs, professional employees, and professional contract workers are sometimes conflated with class assignments, so that "wage labor" is considered to apply only to unskilled, semi-skilled or manual labor.

Wage slavery

Main article: Labour economics

Wage labor, as institutionalized under today's market economic systems, has been criticized, especially by both mainstream socialists and anarcho-syndicalists, using the pejorative term wage slavery. Socialists draw parallels between the trade of labor as a commodity and slavery. Cicero is also known to have suggested such parallels.

The American philosopher John Dewey posited that until "industrial feudalism" is replaced by "industrial democracy", politics will be "the shadow cast on society by big business". Thomas Ferguson has postulated in his investment theory of party competition that the undemocratic nature of economic institutions under capitalism causes elections to become occasions when blocs of investors coalesce and compete to control the state plus cities.

Employment contract

Main article: Employment contract

Australia

Australian employment has been governed by the Fair Work Act since 2009.

Bangladesh

Bangladesh Association of International Recruiting Agencies (BAIRA) is an association of national level with its international reputation of co-operation and welfare of the migrant workforce as well as its approximately 1200 members agencies in collaboration with and support from the Government of Bangladesh.

Canada

In the Canadian province of Ontario, formal complaints can be brought to the Ministry of Labour. In the province of Quebec, grievances can be filed with the Commission des normes du travail.

Germany

Two of the prominent examples of work and employment contracts in Germany are the Werksvertrag or the Arbeitsvertrag, which is a form of Dienstleistungsvertrag (service-oriented contract). An Arbeitsvertrag can also be temporary, whereas a temporary worker is working under Zeitarbeit or Leiharbeit. Another employment setting is Arbeitnehmerüberlassung (ANÜ).

India

Main article: Labour in India

India has options for a fixed term contract or a permanent contract. Both contracts are entitled to minimum wages, fixed working hours and social security contributions.

Pakistan

Pakistan has no contract Labor, Minimum Wage and Provident Funds Acts. Contract labor in Pakistan must be paid minimum wage and certain facilities are to be provided to labor. However, the Acts are not yet fully implemented.

Philippines

In the Philippines, employment is regulated by the Department of Labor and Employment.

Sweden

According to Swedish law, there are three types of employment.

• Test employment (swe: Provanställning), where the employer hires a person for a test period of 6 months maximum. The employment can be ended at any time without giving any reason. This type of employment can be offered only once per employer and in employee combination. Usually, a time limited or normal employment is offered after a test employment.
• Time limited employment (swe: Tidsbegränsad anställning). The employer hires a person for a specified time. Usually, they are extended for a new period. Total maximum two years per employer and employee combination, then it automatically counts as a normal employment.
• Normal employment (swe: Tillsvidareanställning / Fast anställning), which has no time limit (except for retirement etc.). It can still be ended for two reasons: personal reason, immediate end of employment only for strong reasons such as crime, or lack of work tasks (swe: Arbetsbrist), cancellation of employment, usually because of bad income for the company. There is a cancellation period of 1–6 months, and rules for how to select employees, basically those with shortest employment time shall be cancelled first.

There are no laws about minimum salary in Sweden. Instead, there are agreements between employer organizations and trade unions about minimum salaries, and other employment conditions.

There is a type of employment contract which is common but not regulated in law, and that is Hour employment (swe: Timanställning), which can be Normal employment (unlimited), but the work time is unregulated and decided per immediate need basis. The employee is expected to be answering the phone and come to work when needed, e.g. when someone is ill and absent from work. They will receive salary only for actual work time and can in reality be fired for no reason by not being called anymore. This type of contract is common in the public sector.

United Kingdom

A call centre worker confined to a small workstation/booth.

In the United Kingdom, employment contracts are categorized by the government into the following types:

• Fixed-term contract: last for a certain length of time, are set in advance, end when a specific task is completed, ends when a specific event takes place.
• Full-time or part-time contract: has no defined length of time, can be terminated by either party, is to accomplish a specific task, specified number of hours.
• Agency staff
• Freelancers, Consultants and Contractors
• Zero-hour contracts

United States

See also: United States labor law, List of largest employers in the United States, and Labor unions in the United States

 

All employees, private industries, by branches

For purposes of U.S. federal income tax withholding, 26 U.S.C. § 3401(c) provides a definition for the term "employee" specific to chapter 24 of the Internal Revenue Code:

Government employment as % of total employment in EU

"For purposes of this chapter, the term "employee" includes an officer, employee, or elected official of the United States, a State, or any political subdivision thereof, or the District of Columbia, or any agency or instrumentality of any one or more of the foregoing. The term "employee" also includes an officer of a corporation." This definition does not exclude all those who are commonly known as 'employees'. "Similarly, Latham’s instruction which indicated that under 26 U.S.C. § 3401(c) the category of ‘employee’ does not include privately employed wage earners is a preposterous reading of the statute. It is obvious that within the context of both statutes the word ‘includes’ is a term of enlargement not of limitation, and the reference to certain entities or categories is not intended to exclude all others."

Employees are often contrasted with independent contractors, especially when there is dispute as to the worker's entitlement to have matching taxes paid, workers compensation, and unemployment insurance benefits. However, in September 2009, the court case of Brown v. J. Kaz, Inc. ruled that independent contractors are regarded as employees for the purpose of discrimination laws if they work for the employer on a regular basis, and said employer directs the time, place, and manner of employment.

In non-union work environments, in the United States, unjust termination complaints can be brought to the United States Department of Labor.

Labor unions are legally recognized as representatives of workers in many industries in the United States. Their activity today centers on collective bargaining over wages, benefits, and working conditions for their membership, and on representing their members in disputes with management over violations of contract provisions. Larger unions also typically engage in lobbying activities and electioneering at the state and federal level.

Most unions in America are aligned with one of two larger umbrella organizations: the AFL–CIO created in 1955, and the Change to Win Federation which split from the AFL–CIO in 2005. Both advocate policies and legislation on behalf of workers in the United States and Canada, and take an active role in politics. The AFL–CIO is especially concerned with global trade issues.

American business theorist Jeffrey Pfeffer posits that contemporary employment practices and employer commonalities in the United States, including toxic working environments, job insecurity, long hours and increased performance pressure from management, are responsible for 120,000 excess deaths annually, making the workplace the fifth leading cause of death in the United States.

Age-related issues

Younger age workers

Youth employment rate in the US, i.e. the ratio of employed persons (15–24Y) in an economy to total labor force (15–24Y).

 

Main article: Young worker safety and health

Young workers are at higher risk for occupational injury and face certain occupational hazards at a higher rate; this is generally due to their employment in high-risk industries. For example, in the United States, young people are injured at work at twice the rate of their older counterparts. These workers are also at higher risk for motor vehicle accidents at work, due to less work experience, a lower use of seat belts, and higher rates of distracted driving. To mitigate this risk, those under the age of 17 are restricted from certain types of driving, including transporting people and goods under certain circumstances.

High-risk industries for young workers include agriculture, restaurants, waste management, and mining. In the United States, those under the age of 18 are restricted from certain jobs that are deemed dangerous under the Fair Labor Standards Act.

Youth employment programs are most effective when they include both theoretical classroom training and hands-on training with work placements.

In the conversation of employment among younger aged workers, youth unemployment has also been monitored. Youth unemployment rates tend to be higher than the adult rates in every country in the world.

Older age workers

Those older than the statutory defined retirement age may continue to work, either out of enjoyment or necessity. However, depending on the nature of the job, older workers may need to transition into less-physical forms of work to avoid injury. Working past retirement age also has positive effects, because it gives a sense of purpose and allows people to maintain social networks and activity levels. Older workers are often found to be discriminated against by employers.

Working poor

A worker in Dhaka, Bangladesh.

Employment is no guarantee of escaping poverty, the International Labour Organization (ILO) estimates that as many as 40% of workers are poor, not earning enough to keep their families above the $2 a day poverty line. For instance, in India most of the chronically poor are wage earners in formal employment, because their jobs are insecure and low paid and offer no chance to accumulate wealth to avoid risks. According to the UNRISD, increasing labor productivity appears to have a negative impact on job creation: in the 1960s, a 1% increase in output per worker was associated with a reduction in employment growth of 0.07%, by the first decade of this century the same productivity increase implies reduced employment growth by 0.54%. Both increased employment opportunities and increased labor productivity (as long as it also translates into higher wages) are needed to tackle poverty. Increases in employment without increases in productivity leads to a rise in the number of "working poor", which is why some experts are now promoting the creation of "quality" and not "quantity" in labor market policies. This approach does highlight how higher productivity has helped reduce poverty in East Asia, but the negative impact is beginning to show. In Vietnam, for example, employment growth has slowed while productivity growth has continued. Furthermore, productivity increases do not always lead to increased wages, as can be seen in the United States, where the gap between productivity and wages has been rising since the 1980s.

Researchers at the Overseas Development Institute argue that there are differences across economic sectors in creating employment that reduces poverty. 24 instances of growth were examined, in which 18 reduced poverty. This study showed that other sectors were just as important in reducing unemployment, such as manufacturing. The services sector is most effective at translating productivity growth into employment growth. Agriculture provides a safety net for jobs and economic buffer when other sectors are struggling.

Growth, employment and poverty
	Number of episodes	Rising agricultural employment	Rising industrial employment	Rising services employment
Growth episodes associated with falling poverty rates	18	6	10	15
Growth episodes associated with no fall in poverty rates	6	2	3	1

Models of the employment relationship

Scholars conceptualize the employment relationship in various ways. A key assumption is the extent to which the employment relationship necessarily includes conflicts of interests between employers and employees, and the form of such conflicts. In economic theorizing, the labor market mediates all such conflicts such that employers and employees who enter into an employment relationship are assumed to find this arrangement in their own self-interest. In human resource management theorizing, employers and employees are assumed to have shared interests (or a unity of interests, hence the label “unitarism”). Any conflicts that exist are seen as a manifestation of poor human resource management policies or interpersonal clashes such as personality conflicts, both of which can and should be managed away. From the perspective of pluralist industrial relations, the employment relationship is characterized by a plurality of stakeholders with legitimate interests (hence the label “pluralism), and some conflicts of interests are seen as inherent in the employment relationship (e.g., wages v. profits). Lastly, the critical paradigm emphasizes antagonistic conflicts of interests between various groups (e.g., the competing capitalist and working classes in a Marxist framework) that are part of a deeper social conflict of unequal power relations. As a result, there are four common models of employment:

1. Mainstream economics: employment is seen as a mutually advantageous transaction in a free market between self-interested legal and economic equals
2. Human resource management (unitarism): employment is a long-term partnership of employees and employers with common interests
3. Pluralist industrial relations: employment is a bargained exchange between stakeholders with some common and some competing economic interests and unequal bargaining power due to imperfect labor markets
4. Critical industrial relations: employment is an unequal power relation between competing groups that is embedded in and inseparable from systemic inequalities throughout the socio-politico-economic system.

These models are important because they help reveal why individuals hold differing perspectives on human resource management policies, labor unions, and employment regulation. For example, human resource management policies are seen as dictated by the market in the first view, as essential mechanisms for aligning the interests of employees and employers and thereby creating profitable companies in the second view, as insufficient for looking out for workers’ interests in the third view, and as manipulative managerial tools for shaping the ideology and structure of the workplace in the fourth view.

Academic literature

Literature on the employment impact of economic growth and on how growth is associated with employment at a macro, sector and industry level was aggregated in 2013.

Researchers found evidence to suggest growth in manufacturing and services have good impact on employment. They found GDP growth on employment in agriculture to be limited, but that value-added growth had a relatively larger impact. The impact on job creation by industries/economic activities as well as the extent of the body of evidence and the key studies. For extractives, they again found extensive evidence suggesting growth in the sector has limited impact on employment. In textiles, however, although evidence was low, studies suggest growth there positively contributed to job creation. In agri-business and food processing, they found impact growth to be positive.

They found that most available literature focuses on OECD and middle-income countries somewhat, where economic growth impact has been shown to be positive on employment. The researchers didn't find sufficient evidence to conclude any impact of growth on employment in LDCs despite some pointing to the positive impact, others point to limitations. They recommended that complementary policies are necessary to ensure economic growth's positive impact on LDC employment. With trade, industry and investment, they only found limited evidence of positive impact on employment from industrial and investment policies and for others, while large bodies of evidence does exist, the exact impact remains contested.

Researchers have also explored the relationship between employment and illicit activities. Using evidence from Africa, a research team found that a program for Liberian ex-fighters reduced work hours on illicit activities. The employment program also reduced interest in mercenary work in nearby wars. The study concludes that while the use of capital inputs or cash payments for peaceful work created a reduction in illicit activities, the impact of training alone is rather low.

Globalization and employment relations

The balance of economic efficiency and social equity is the ultimate debate in the field of employment relations. By meeting the needs of the employer; generating profits to establish and maintain economic efficiency; whilst maintaining a balance with the employee and creating social equity that benefits the worker so that he/she can fund and enjoy healthy living; proves to be a continuous revolving issue in westernized societies.

Globalization has affected these issues by creating certain economic factors that disallow or allow various employment issues. Economist Edward Lee (1996) studies the effects of globalization and summarizes the four major points of concern that affect employment relations:

1. International competition, from the newly industrialized countries, will cause unemployment growth and increased wage disparity for unskilled workers in industrialized countries. Imports from low-wage countries exert pressure on the manufacturing sector in industrialized countries and foreign direct investment (FDI) is attracted away from the industrialized nations, towards low-waged countries.
2. Economic liberalization will result in unemployment and wage inequality in developing countries. This happens as job losses in uncompetitive industries outstrip job opportunities in new industries.
3. Workers will be forced to accept worsening wages and conditions, as a global labor market results in a “race to the bottom”. Increased international competition creates a pressure to reduce the wages and conditions of workers.
4. Globalization reduces the autonomy of the nation state. Capital is increasingly mobile and the ability of the state to regulate economic activity is reduced.

What also results from Lee's (1996) findings is that in industrialized countries an average of almost 70 per cent of workers are employed in the service sector, most of which consists of non-tradable activities. As a result, workers are forced to become more skilled and develop sought after trades, or find other means of survival. Ultimately this is a result of changes and trends of employment, an evolving workforce, and globalization that is represented by a more skilled and increasing highly diverse labor force, that are growing in non standard forms of employment (Markey, R. et al. 2006).

Alternatives

Subcultures

Various youth subcultures have been associated with not working, such as the hippie subculture in the 1960s and 1970s (which endorsed the idea of "dropping out" of society) and the punk subculture.

Post-secondary education

One of the alternatives to work is engaging in post-secondary education at a college, university or professional school. One of the major costs of obtaining a post-secondary education is the opportunity cost of forgone wages due to not working. At times when jobs are hard to find, such as during recessions, unemployed individuals may decide to get post-secondary education, because there is less of an opportunity cost.

Social assistance

In some countries, individuals who are not working can receive social assistance support (e.g., welfare or food stamps) to enable them to rent housing, buy food, repair or replace household goods, maintenance of children and observe social customs that require financial expenditure.

Volunteerism

Workers who are not paid wages, such as volunteers who perform tasks for charities, hospitals or not-for-profit organizations, are generally not considered employed. One exception to this is an internship, an employment situation in which the worker receives training or experience (and possibly college credit) as the chief form of compensation.

Indentured servitude and slavery

Those who work under obligation for the purpose of fulfilling a debt, such as indentured servants, or as property of the person or entity they work for, such as slaves, do not receive pay for their services and are not considered employed. Some historians suggest that slavery is older than employment, but both arrangements have existed for all recorded history. Indentured servitude and slavery are not considered compatible with human rights or with democracy.

Production (economics)

From Wikipedia, the free encyclopedia

https://en.wikipedia.org/wiki/Production_(economics) 

Production is the process of combining various material inputs and immaterial inputs (plans, knowledge) in order to make something for consumption (output). It is the act of creating an output, a good or service which has value and contributes to the utility of individuals. The area of economics that focuses on production is referred to as production theory, which is intertwined with the consumption (or consumer) theory of economics.

Four Factors of Production (Jiang, 2020)

The production process and output directly result from productively utilising the original inputs (or factors of production). Known as primary producer goods or services, land, labour, and capital are deemed the three fundamental production factors. These primary inputs are not significantly altered in the output process, nor do they become a whole component in the product. Under classical economics, materials and energy are categorised as secondary factors as they are byproducts of land, labour and capital. Delving further, primary factors encompass all of the resourcing involved, such as land, which includes the natural resources above and below the soil. However, there is a difference in human capital and labour. In addition to the common factors of production, in different economic schools of thought, entrepreneurship and technology are sometimes considered evolved factors in production. It is common practice that several forms of controllable inputs are used to achieve the output of a product. The production function assesses the relationship between the inputs and the quantity of output.

Economic well-being is created in a production process, meaning all economic activities that aim directly or indirectly to satisfy human wants and needs. The degree to which the needs are satisfied is often accepted as a measure of economic well-being. In production there are two features which explain increasing economic well-being. They are improving quality-price-ratio of goods and services and increasing incomes from growing and more efficient market production or total production which help in increasing GDP. The most important forms of production are:

• market production
• public production
• household production

In order to understand the origin of economic well-being, we must understand these three production processes. All of them produce commodities which have value and contribute to the well-being of individuals.

The satisfaction of needs originates from the use of the commodities which are produced. The need satisfaction increases when the quality-price-ratio of the commodities improves and more satisfaction is achieved at less cost. Improving the quality-price-ratio of commodities is to a producer an essential way to improve the competitiveness of products but this kind of gains distributed to customers cannot be measured with production data. Improving the competitiveness of products means often to the producer lower product prices and therefore losses in incomes which are to be compensated with the growth of sales volume.

Economic well-being also increases due to the growth of incomes that are gained from the growing and more efficient market production. Market production is the only production form that creates and distributes incomes to stakeholders. Public production and household production are financed by the incomes generated in market production. Thus market production has a double role in creating well-being, i.e. the role of producing goods and services and the role of creating income. Because of this double role, market production is the “primus motor” of economic well-being and therefore here under review.

Elements of Production Economics

The underlying assumption of production is that maximisation of profit is the key objective of the producer. The difference in the value of the production values (the output value) and costs (associated with the factors of production) is the calculated profit. Efficiency, technological, pricing, behavioural, consumption and productivity changes are a few of the critical elements that significantly influence production economics.

Efficiency

Main article: Efficiency

Within production, efficiency plays a tremendous role in achieving and maintaining full capacity, rather than producing an inefficient (not optimal) level. Changes in efficiency relate to the positive shift in current inputs, such as technological advancements, relative to the producer's position. Efficiency is calculated by the maximum potential output divided by the actual input. An example of the efficiency calculation is that if the applied inputs have the potential to produce 100 units but are producing 60 units, the efficiency of the output is 0.6, or 60%. Furthermore, economies of scale identify the point at which production efficiency (returns) can be increased, decrease or remain constant.  

Technological changes

Main article: Technical progress (economics)

This element sees the ongoing adaption of technology at the frontier of the production function. Technological change is a significant determinant in advancing economic production results, as noted throughout economic histories, such as the industrial revolution. Therefore, it is critical to continue to monitor its effects on production and promote the development of new technologies.

Behaviour, consumption and productivity

There is a strong correlation between the producer's behaviour and the underlying assumption of production – both assume profit maximising behaviour. Production can be either increased, decreased or remain constant as a result of consumption, amongst various other factors. The relationship between production and consumption is mirror against the economic theory of supply and demand. Accordingly, when production decreases more than factor consumption, this results in reduced productivity. Contrarily, a production increase over consumption is seen as increased productivity.

Pricing

In an economic market, production input and output prices are assumed to be set from external factors as the producer is the price taker. Hence, pricing is an important element in the real-world application of production economics. Should the pricing be too high, the production of the product is simply unviable. There is also a strong link between pricing and consumption, with this influencing the overall production scale.

As a source of economic well-being

In principle there are two main activities in an economy, production and consumption. Similarly, there are two kinds of actors, producers and consumers. Well-being is made possible by efficient production and by the interaction between producers and consumers. In the interaction, consumers can be identified in two roles both of which generate well-being. Consumers can be both customers of the producers and suppliers to the producers. The customers' well-being arises from the commodities they are buying and the suppliers' well-being is related to the income they receive as compensation for the production inputs they have delivered to the producers.

Stakeholders of production

Stakeholders of production are persons, groups or organizations with an interest in a producing company. Economic well-being originates in efficient production and it is distributed through the interaction between the company's stakeholders. The stakeholders of companies are economic actors which have an economic interest in a company. Based on the similarities of their interests, stakeholders can be classified into three groups in order to differentiate their interests and mutual relations. The three groups are as follows:

Interactive contributions of a company’s stakeholders (Saari, 2011, 4)

Customers

The customers of a company are typically consumers, other market producers or producers in the public sector. Each of them has their individual production functions. Due to competition, the price-quality-ratios of commodities tend to improve and this brings the benefits of better productivity to customers. Customers get more for less. In households and the public sector this means that more need satisfaction is achieved at less cost. For this reason, the productivity of customers can increase over time even though their incomes remain unchanged.

Suppliers

The suppliers of companies are typically producers of materials, energy, capital, and services. They all have their individual production functions. The changes in prices or qualities of supplied commodities have an effect on both actors' (company and suppliers) production functions. We come to the conclusion that the production functions of the company and its suppliers are in a state of continuous change.

Producers

Those participating in production, i.e., the labour force, society and owners, are collectively referred to as the producer community or producers. The producer community generates income from developing and growing production.

The well-being gained through commodities stems from the price-quality relations of the commodities. Due to competition and development in the market, the price-quality relations of commodities tend to improve over time. Typically the quality of a commodity goes up and the price goes down over time. This development favourably affects the production functions of customers. Customers get more for less. Consumer customers get more satisfaction at less cost. This type of well-being generation can only partially be calculated from the production data. The situation is presented in this study. The producer community (labour force, society, and owners) earns income as compensation for the inputs they have delivered to the production. When the production grows and becomes more efficient, the income tends to increase. In production this brings about an increased ability to pay salaries, taxes and profits. The growth of production and improved productivity generate additional income for the producing community. Similarly, the high income level achieved in the community is a result of the high volume of production and its good performance. This type of well-being generation – as mentioned earlier - can be reliably calculated from the production data.

Main processes of a producing company

A producing company can be divided into sub-processes in different ways; yet, the following five are identified as main processes, each with a logic, objectives, theory and key figures of its own. It is important to examine each of them individually, yet, as a part of the whole, in order to be able to measure and understand them. The main processes of a company are as follows:

Main processes of a producing company (Saari 2006, 3)

• real process.
• income distribution process
• production process.
• monetary process.
• market value process.

Production output is created in the real process, gains of production are distributed in the income distribution process and these two processes constitute the production process. The production process and its sub-processes, the real process and income distribution process occur simultaneously, and only the production process is identifiable and measurable by the traditional accounting practices. The real process and income distribution process can be identified and measured by extra calculation, and this is why they need to be analyzed separately in order to understand the logic of production and its performance.

Real process generates the production output from input, and it can be described by means of the production function. It refers to a series of events in production in which production inputs of different quality and quantity are combined into products of different quality and quantity. Products can be physical goods, immaterial services and most often combinations of both. The characteristics created into the product by the producer imply surplus value to the consumer, and on the basis of the market price this value is shared by the consumer and the producer in the marketplace. This is the mechanism through which surplus value originates to the consumer and the producer likewise. Surplus values to customers cannot be measured from any production data. Instead the surplus value to a producer can be measured. It can be expressed both in terms of nominal and real values. The real surplus value to the producer is an outcome of the real process, real income, and measured proportionally it means productivity.

The concept “real process” in the meaning quantitative structure of production process was introduced in Finnish management accounting in the 1960s. Since then it has been a cornerstone in the Finnish management accounting theory. (Riistama et al. 1971)

Income distribution process of the production refers to a series of events in which the unit prices of constant-quality products and inputs alter causing a change in income distribution among those participating in the exchange. The magnitude of the change in income distribution is directly proportionate to the change in prices of the output and inputs and to their quantities. Productivity gains are distributed, for example, to customers as lower product sales prices or to staff as higher income pay.

The production process consists of the real process and the income distribution process. A result and a criterion of success of the owner is profitability. The profitability of production is the share of the real process result the owner has been able to keep to himself in the income distribution process. Factors describing the production process are the components of profitability, i.e., returns and costs. They differ from the factors of the real process in that the components of profitability are given at nominal prices whereas in the real process the factors are at periodically fixed prices.

Monetary process refers to events related to financing the business. Market value process refers to a series of events in which investors determine the market value of the company in the investment markets.

Production growth and performance

Main article: Economic growth

Economic growth is often defined as a production increase of an output of a production process. It is usually expressed as a growth percentage depicting growth of the real production output. The real output is the real value of products produced in a production process and when we subtract the real input from the real output we get the real income. The real output and the real income are generated by the real process of production from the real inputs.

The real process can be described by means of the production function. The production function is a graphical or mathematical expression showing the relationship between the inputs used in production and the output achieved. Both graphical and mathematical expressions are presented and demonstrated. The production function is a simple description of the mechanism of income generation in production process. It consists of two components. These components are a change in production input and a change in productivity.

Components of economic growth (Saari 2006, 2)

The figure illustrates an income generation process (exaggerated for clarity). The Value T2 (value at time 2) represents the growth in output from Value T1 (value at time 1). Each time of measurement has its own graph of the production function for that time (the straight lines). The output measured at time 2 is greater than the output measured at time one for both of the components of growth: an increase of inputs and an increase of productivity. The portion of growth caused by the increase in inputs is shown on line 1 and does not change the relation between inputs and outputs. The portion of growth caused by an increase in productivity is shown on line 2 with a steeper slope. So increased productivity represents greater output per unit of input.

The growth of production output does not reveal anything about the performance of the production process. The performance of production measures production's ability to generate income. Because the income from production is generated in the real process, we call it the real income. Similarly, as the production function is an expression of the real process, we could also call it “income generated by the production function”.

The real income generation follows the logic of the production function. Two components can also be distinguished in the income change: the income growth caused by an increase in production input (production volume) and the income growth caused by an increase in productivity. The income growth caused by increased production volume is determined by moving along the production function graph. The income growth corresponding to a shift of the production function is generated by the increase in productivity. The change of real income so signifies a move from the point 1 to the point 2 on the production function (above). When we want to maximize the production performance we have to maximize the income generated by the production function.

The sources of productivity growth and production volume growth are explained as follows. Productivity growth is seen as the key economic indicator of innovation. The successful introduction of new products and new or altered processes, organization structures, systems, and business models generates growth of output that exceeds the growth of inputs. This results in growth in productivity or output per unit of input. Income growth can also take place without innovation through replication of established technologies. With only replication and without innovation, output will increase in proportion to inputs. (Jorgenson et al. 2014,2) This is the case of income growth through production volume growth.

Jorgenson et al. (2014,2) give an empiric example. They show that the great preponderance of economic growth in the US since 1947 involves the replication of existing technologies through investment in equipment, structures, and software and expansion of the labor force. Further, they show that innovation accounts for only about twenty percent of US economic growth.

In the case of a single production process (described above) the output is defined as an economic value of products and services produced in the process. When we want to examine an entity of many production processes we have to sum up the value-added created in the single processes. This is done in order to avoid the double accounting of intermediate inputs. Value-added is obtained by subtracting the intermediate inputs from the outputs. The most well-known and used measure of value-added is the GDP (Gross Domestic Product). It is widely used as a measure of the economic growth of nations and industries.

Absolute (total) and average income

The production performance can be measured as an average or an absolute income. Expressing performance both in average (avg.) and absolute (abs.) quantities is helpful for understanding the welfare effects of production. For measurement of the average production performance, we use the known productivity ratio

• Real output / Real input.

The absolute income of performance is obtained by subtracting the real input from the real output as follows:

• Real income (abs.) = Real output – Real input

The growth of the real income is the increase of the economic value that can be distributed between the production stakeholders. With the aid of the production model we can perform the average and absolute accounting in one calculation. Maximizing production performance requires using the absolute measure, i.e. the real income and its derivatives as a criterion of production performance.

Maximizing productivity also leads to the phenomenon called "jobless growth" This refers to economic growth as a result of productivity growth but without creation of new jobs and new incomes from them. A practical example illustrates the case. When a jobless person obtains a job in market production we may assume it is a low productivity job. As a result, average productivity decreases but the real income per capita increases. Furthermore, the well-being of the society also grows. This example reveals the difficulty to interpret the total productivity change correctly. The combination of volume increase and total productivity decrease leads in this case to the improved performance because we are on the “diminishing returns” area of the production function. If we are on the part of “increasing returns” on the production function, the combination of production volume increase and total productivity increase leads to improved production performance. Unfortunately, we do not know in practice on which part of the production function we are. Therefore, a correct interpretation of a performance change is obtained only by measuring the real income change.

Production Function

In the short run, the production function assumes there is at least one fixed factor input. The production function relates the quantity of factor inputs used by a business to the amount of output that result. There are three measure of production and productivity. The first one is total output(total product). It is straightforward to measure how much output is being produced in the manufacturing industries like motor vehicles. In the tertiary industry such as service or knowledge industries, it is harder to measure the outputs since they are less tangible.

The second way of measuring production and efficiency is average output. It measures output per-worker-employed or output-per-unit of capital. The third measures of production and efficiency is the marginal product. It is the change in output from increasing the number of workers used by one person, or by adding one more machine to the production process in the short run.

The law of diminishing marginal returns points out that as more units of a variable input are added to fixed amounts of land and capital, the change in total output would rise firstly and then fall.

The length of time required for all the factor of production to be flexible varies from industry to industry. For example, in the nuclear power industry, it takes many years to commission new nuclear power plant and capacity.

Real-life examples of the firm's short - term production equations may not be quite the same as the smooth production theory of the department. In order to improve efficiency and promote the structural transformation of economic growth, it is most important to establish the industrial development model related to it. At the same time, a shift should be made to models that contain typical characteristics of the industry, such as specific technological changes and significant differences in the likelihood of substitution before and after investment. 

Production models

A production model is a numerical description of the production process and is based on the prices and the quantities of inputs and outputs. There are two main approaches to operationalize the concept of production function. We can use mathematical formulae, which are typically used in macroeconomics (in growth accounting) or arithmetical models, which are typically used in microeconomics and management accounting. We do not present the former approach here but refer to the survey “Growth accounting” by Hulten 2009. Also see an extensive discussion of various production models and their estimations in Sickles and Zelenyuk (2019, Chapter 1-2).

We use here arithmetical models because they are like the models of management accounting, illustrative and easily understood and applied in practice. Furthermore, they are integrated to management accounting, which is a practical advantage. A major advantage of the arithmetical model is its capability to depict production function as a part of production process. Consequently, production function can be understood, measured, and examined as a part of production process.

There are different production models according to different interests. Here we use a production income model and a production analysis model in order to demonstrate production function as a phenomenon and a measureable quantity.

Production income model

Profitability of production measured by surplus value (Saari 2006, 3)

The scale of success run by a going concern is manifold, and there are no criteria that might be universally applicable to success. Nevertheless, there is one criterion by which we can generalise the rate of success in production. This criterion is the ability to produce surplus value. As a criterion of profitability, surplus value refers to the difference between returns and costs, taking into consideration the costs of equity in addition to the costs included in the profit and loss statement as usual. Surplus value indicates that the output has more value than the sacrifice made for it, in other words, the output value is higher than the value (production costs) of the used inputs. If the surplus value is positive, the owner’s profit expectation has been surpassed.

The table presents a surplus value calculation. We call this set of production data a basic example and we use the data through the article in illustrative production models. The basic example is a simplified profitability calculation used for illustration and modelling. Even as reduced, it comprises all phenomena of a real measuring situation and most importantly the change in the output-input mix between two periods. Hence, the basic example works as an illustrative “scale model” of production without any features of a real measuring situation being lost. In practice, there may be hundreds of products and inputs but the logic of measuring does not differ from that presented in the basic example.

In this context, we define the quality requirements for the production data used in productivity accounting. The most important criterion of good measurement is the homogenous quality of the measurement object. If the object is not homogenous, then the measurement result may include changes in both quantity and quality but their respective shares will remain unclear. In productivity accounting this criterion requires that every item of output and input must appear in accounting as being homogenous. In other words, the inputs and the outputs are not allowed to be aggregated in measuring and accounting. If they are aggregated, they are no longer homogenous and hence the measurement results may be biased.

Both the absolute and relative surplus value have been calculated in the example. Absolute value is the difference of the output and input values and the relative value is their relation, respectively. The surplus value calculation in the example is at a nominal price, calculated at the market price of each period.

Production analysis model

Production Model Saari 2004 (Saari 2006, 4)

A model used here is a typical production analysis model by help of which it is possible to calculate the outcome of the real process, income distribution process and production process. The starting point is a profitability calculation using surplus value as a criterion of profitability. The surplus value calculation is the only valid measure for understanding the connection between profitability and productivity or understanding the connection between real process and production process. A valid measurement of total productivity necessitates considering all production inputs, and the surplus value calculation is the only calculation to conform to the requirement. If we omit an input in productivity or income accounting, this means that the omitted input can be used unlimitedly in production without any cost impact on accounting results.

Accounting and interpreting

The process of calculating is best understood by applying the term ceteris paribus, i.e. "all other things being the same," stating that at a time only the impact of one changing factor be introduced to the phenomenon being examined. Therefore, the calculation can be presented as a process advancing step by step. First, the impacts of the income distribution process are calculated, and then, the impacts of the real process on the profitability of the production.

The first step of the calculation is to separate the impacts of the real process and the income distribution process, respectively, from the change in profitability (285.12 – 266.00 = 19.12). This takes place by simply creating one auxiliary column (4) in which a surplus value calculation is compiled using the quantities of Period 1 and the prices of Period 2. In the resulting profitability calculation, Columns 3 and 4 depict the impact of a change in income distribution process on the profitability and in Columns 4 and 7 the impact of a change in real process on the profitability.

The accounting results are easily interpreted and understood. We see that the real income has increased by 58.12 units from which 41.12 units come from the increase of productivity growth and the rest 17.00 units come from the production volume growth. The total increase of real income (58.12) is distributed to the stakeholders of production, in this case, 39.00 units to the customers and to the suppliers of inputs and the rest 19.12 units to the owners.

Here we can make an important conclusion. Income formation of production is always a balance between income generation and income distribution. The income change created in a real process (i.e. by production function) is always distributed to the stakeholders as economic values within the review period. Accordingly, the changes in real income and income distribution are always equal in terms of economic value.

Based on the accounted changes of productivity and production volume values we can explicitly conclude on which part of the production function the production is. The rules of interpretations are the following:

The production is on the part of “increasing returns” on the production function, when

• productivity and production volume increase or
• productivity and production volume decrease

The production is on the part of “diminishing returns” on the production function, when

• productivity decreases and volume increases or
• productivity increases and volume decreases.

In the basic example, the combination of volume growth (+17.00) and productivity growth (+41.12) reports explicitly that the production is on the part of “increasing returns” on the production function (Saari 2006 a, 138–144).

Another production model (Production Model Saari 1989) also gives details of the income distribution (Saari 2011,14). Because the accounting techniques of the two models are different, they give differing, although complementary, analytical information. The accounting results are, however, identical. We do not present the model here in detail but we only use its detailed data on income distribution, when the objective functions are formulated in the next section.

Objective functions

An efficient way to improve the understanding of production performance is to formulate different objective functions according to the objectives of the different interest groups. Formulating the objective function necessitates defining the variable to be maximized (or minimized). After that other variables are considered as constraints or free variables. The most familiar objective function is profit maximization which is also included in this case. Profit maximization is an objective function that stems from the owner's interest and all other variables are constraints in relation to maximizing of profits in the organization.

Summary of objective function formulations (Saari 2011, 17)

The procedure for formulating objective functions

The procedure for formulating different objective functions, in terms of the production model, is introduced next. In the income formation from production the following objective functions can be identified:

• Maximizing the real income
• Maximizing the producer income
• Maximizing the owner income.

These cases are illustrated using the numbers from the basic example. The following symbols are used in the presentation: The equal sign (=) signifies the starting point of the computation or the result of computing and the plus or minus sign (+ / -) signifies a variable that is to be added or subtracted from the function. A producer means here the producer community, i.e. labour force, society and owners.

Objective function formulations can be expressed in a single calculation which concisely illustrates the logic of the income generation, the income distribution and the variables to be maximized.

The calculation resembles an income statement starting with the income generation and ending with the income distribution. The income generation and the distribution are always in balance so that their amounts are equal. In this case, it is 58.12 units. The income which has been generated in the real process is distributed to the stakeholders during the same period. There are three variables that can be maximized. They are the real income, the producer income and the owner income. Producer income and owner income are practical quantities because they are addable quantities and they can be computed quite easily. Real income is normally not an addable quantity and in many cases it is difficult to calculate.

The dual approach for the formulation

Here we have to add that the change of real income can also be computed from the changes in income distribution. We have to identify the unit price changes of outputs and inputs and calculate their profit impacts (i.e. unit price change x quantity). The change of real income is the sum of these profit impacts and the change of owner income. This approach is called the dual approach because the framework is seen in terms of prices instead of quantities (ONS 3, 23).

The dual approach has been recognized in growth accounting for long but its interpretation has remained unclear. The following question has remained unanswered: “Quantity based estimates of the residual are interpreted as a shift in the production function, but what is the interpretation of the price-based growth estimates?” (Hulten 2009, 18). We have demonstrated above that the real income change is achieved by quantitative changes in production and the income distribution change to the stakeholders is its dual. In this case, the duality means that the same accounting result is obtained by accounting the change of the total income generation (real income) and by accounting the change of the total income distribution.