Labor Productivity Definition
Labor productivity is a concept used to measure the efficiency of the worker and 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 under-performing or not. The concept can also be used on a national level so as to calculate GDP (Gross Domestic Product) of a country.
Labor Productivity Formula
Productivity for a worker can be calculated using the following formula.
Labor Productivity = Value of Goods & Services Produced / Input Man Hour
The result will provide the productivity per hour.
How to Calculate Labor Productivity?
Following are the three steps are involved to calculate labor productivity.
- Calculate the Value of Goods and Services Produced
This step involves calculating the money value of goods and services being produced or rendered by an employee during the given period of time. Value means such value at which those goods or services will be sold.
- Identify Input Man Hours
Input man-hours mean the total number of hours taken by the employee to produce the goods or render the service.
- 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 of Labor Productivity
In a company named Goodwill Ltd, a worker produced 20 units of a product in 5 hours. The units are sold by the company at the rate of $30 per unit. Let us calculate the productivity of the worker in this case.
- Value of goods produced = 20 units * $30 per unit = $600
Hence, a worker produces worth of $120 goods in one hour.
A lot of factors may affect productivity which are as follows-
Level of training influences labor productivity. If proper training is provided to the workers, productively is expected to increase.
If the workers are subjected to overtime hours, the productively will be negatively impacted as the workers will feel tired and lethargic.
- Motivation Level
The workers tend to perform better when they feel motivated. Thus, it is important to create an environment in the organization in which the workers feel motivated and confident.
- Inputs Used
If a worker is using raw materials or machinery which is defective, the productivity of worker will be affected.
Labor Productivity vs Total Factor Productivity
Labor productivity means the level of production of goods or services per unit of time. It reflects the efficiency of the workers in the production of goods or rendering or services in terms of time utilized. No other factors of input are considered apart from input time.
Whereas, total factor productivity means the level of production in terms of the weighted average of two inputs namely, labor and capital. It is calculated by dividing the total production by the weighted average of time and capital. Thus, total factor productivity takes into consideration the effect of two inputs, labor, and capital.
In terms of labor productivity for companies, the concept is useful in the sense that it reflects how well the workers are performing. It can be used to set standard productively level, based on which the incentive schemes for remunerating the good performing workers can be developed. It also helps the businesses to consider if they need to take any steps for improvement in productivity levels.
Talking about labor productivity in terms of the overall economy, it reflects the level of GDP. It also indicates an improved standard of living in case of an increase in consumption levels. This is because if productivity increases it means that more goods and services are produced in the same period of time and thus, consumption levels will increase too.
- Increased productivity would mean the effective use of resources and lower cost of production.
- The lower average costsAverage CostsAverage cost refers to the per-unit cost of production, calculated by dividing the total production cost by the total number of units produced. In other words, it measures the amount of money that the business has to spend to produce each unit of output., in turn, will lead to good profits.
- A company where labor productivity is high will have a competitive edge over others.
- With respect to employees, the employees having better productivity can claim the benefits of performance-based benefits provided by the company.
- Improved productivity also means the overall economic conditions will be improved.
- This concept does not take into account the effect of other inputs such as capital.
- Further, the productivity may be affected by many other factors such as the condition of types of machinery used, raw material used which are not taken into account.
The concept of labor productively in used on a business level as well as country level. The concept is being widely used by economists around the globe and is very useful.
This has been a guide to Labor Productivity and its definition. Here we discuss how to calculate labor productivity along with examples, factors, limitations, and differences with total factor productivity. You may learn more about Financing from the following articles –