Labor Productivity

Article byNiti Gupta
Reviewed byDheeraj Vaidya, CFA, FRM

What Is Labor Productivity?

Labor productivity is a concept used to measure the worker’s efficiency. It is calculated as the value of output produced by a worker per unit of time, such as an hour. By comparing the individual productivity with average, it can be identified whether a particular worker is underperforming or not.

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The concept can also be used on a national level to calculate the GDP (Gross Domestic Product). This is also used on a business level and a country level. Economists around the globe are widely using the concept.

Key Takeaways

  • Labor productivity is a theory used to calculate the worker’s efficiency. One may calculate it as a worker’s output per unit of time, such as an hour. Then, comparing individual productivity with the average, whether a particular worker is underperforming can be determined. 
  • The factors that may affect productivity are training, overtime, motivation level, and inputs used.
  • The concept is helpful for companies in labor productivity since it shows the worker’s performance. Thus, one may use it to set a standard productively, based on which the incentive schemes for remunerating the good performing workers can be developed. It also helps businesses consider if they need to take any steps to improve productivity levels.

Labor Productivity Explained

Labor productivity is the concept that explains the efficiency level of the laborers in an economy. This efficiency level can be measured by comparing the output or the production level with the number of hours that are required to achieve that quantity of production.

Thus, within a given time period, the production capacity that can be achieved using a particular number of laborers is their productivity level.

This measurement shows the condition of the economy at any point of time. If it is seen that the production has increased whereas the number of laborer required has not gone up, it signifies that the labor productivity growth has increased, because now more output is achieved with same effort and same time.

The above also leads to the fact that the price comes down since the quantity of goods and services in the economy rises. Thus, increased productivity means a reasonable and affordable price level in the country.

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Formula

We can calculate labor productivity  using the following formula.

Labor Productivity = Value of Goods & Services Produced / Input Man Hour

The result will provide the productivity per hour.

Labor-Productivity

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How To Calculate?

Steps of Labor Productivity

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Following are the three steps used to calculate labor productivity.

  1. Calculate the Value of Goods and Services Produced

    This step involves calculating the money value of goods and services produced or rendered by an employee during the given period. Value means such value at which those goods or services will be sold.

  2. Identify Input Man Hours

    Input person-hours mean the total number of hours taken by the employee to produce the goods or render the service.

  3. Divide and Calculate the Result

    The last step is to divide the value of goods and services produced with input man-hours. The resultant figure will provide productivity per hour for an employee.

Example

In Goodwill Ltd, a worker produced 20 units in 5 hours. The company sells the units at $30 per unit. Let us calculate the productivity of the worker in this case.

Solution

Labor Productivity Example
  • Value of goods produced = 20 units * $30 per unit = $600
  • =$600/5
  • =$120

Hence, a worker produces worth of $120 goods in one hour.

Factors

A lot of factors may affect productivity which are as follows-

Factors of Labor Productivity

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  • Training

Level of training increase labor productivity. If proper training is provided to the workers, productively is expected to increase. The laborers can have a clear idea about the method and technique of their work and try to achieve more work within less time.

  • Overtime

If the workers are subjected to overtime hours, the productively will be negatively impacted as the workers will feel tired and lethargic. They might lose their focus and end up making a lot of errors due to lack of energy and an effort to somehow finish the work and leave.

  • Motivation Level

The workers tend to perform better when they feel motivated. Thus, it is important to create an environment where the workers feel motivated and confident and this will help to increase labor productivity.

  • Inputs Used

If a worker uses raw materials or defective machinery, the worker’s productivity will be affected. It will lead to more time consumption but the end product will be defective and unsatisfactory. It can be concluded that the effort and time given in manufacturing the goods and services will be totally wasted.

Importance

Let us look at some of the importance of the concept.

  • The concept is useful for companies in terms of labor productivity because it reflects how well the workers perform.
  • It can be used to set a standard productively, based on which the incentive schemes for remunerating the good performing workers can be developed.
  • It also helps the businesses consider if they need to take any steps to improve productivity levels.
  • Talking about labor productivity in terms of the overall economy reflects GDP. More goods and services are produced in the same period if productivity increases, thus increasing consumption levels.
  • An increase in labor productivity also indicates an improved standard of living in case of increased consumption levels.

Benefits

Limitations

  • This concept does not consider the effect of other inputs such as capital.
  • Further, productivity may be affected by many other factors, such as the condition of the types of machinery used, which should be considered.

Labor Productivity Vs Total Factor Productivity

  • Labor productivity means the production of goods or services per unit of time. It reflects the efficiency of the workers in the production of goods or rendering of services in terms of time utilized. Total factor productivity means the production level in terms of the weighted average of two inputs, namely, labor and capital.
  • The former is calculated by dividing the total production by the total labor hours, whereas the latter is calculated by dividing the total production by the weighted average of time and capital.
  • No other factors of input are considered apart from input time in the case of the former, but in the latter’s case, it considers the effect of two inputs – labor and capital.

Frequently Asked Questions (FAQs)

How to increase labor productivity?

Labor productivity primarily involves capital investment, technological progress, and human capital development. Businesses and government may boost the workers’ labor productivity by directly investing in or incentivizing technical and human or physical capital increases.

How did factories contribute to increased labor productivity?

The workers are considered as the labor, and the machines are regarded as the capital. Thus, to increase productivity, each worker can generate more output. It is called labor productivity growth. It may happen only through increased money used in the production process.

How does labor productivity affect supply?

An economy can produce increasingly more goods and services for similar work, along with the growth in labor productivity. Owing to additional production, a greater quantity of goods and services can sooner or later be used for a given amount of work.

How do technological advancements impact labor productivity?

By increasing the factors of production productivity, technological growth inflates an economy’s production possibility frontier. So, a similar quantity of output can be created with several resources, or more work can be generated with an equal amount of resources.

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