What Is Labour Productivity (With Definition and Formula)

By Indeed Editorial Team

Published 2 May 2022

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

You may have come across the term labour productivity in the course of your professional career. There are many different ways to calculate the productivity of a country or a company, and a popular way is by using labour productivity. If you work in business, management or human resources (HR) l,earning more about labour productivity may enhance your knowledge and skills to excel in your job. In this article, we discuss the definition of productivity, explain the importance of labour productivity and show how to calculate labour productivity.

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What is labour productivity?

Labour productivity looks at how productive a company or an economy is and can be calculated using formulas. For instance, the formula may help in determining the hourly output of a company. By finding out the real output per employee, individuals can analyse trends to propose policy solutions.

A variety of factors may affect a company's or country's labour productivity. For example, investment in technology or human resources may lead to a rise in labour productivity. Similarly, greater investment in capital could lead to a more productive economy. All these changes may occur as a result of the actions of a government or leading companies within various industries.

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Why is it important to calculate labour productivity?

Here are some reasons why it's important to calculate labour productivity:

Gain a first-mover advantage

Companies may analyse and take note of labour productivity rates for reasons, such as gaining a first-mover advantage. A first-mover advantage means the company may benefit from being the first to enter a certain market. A company may spend time, effort and financial resources to train or retrain staff members. This investment in human resources could increase the work output of the company and lead to greater revenue over time. Alternatively, a company may choose to invest in improving its technological capabilities to decrease operational costs. Any technological advancements could lead to greater efficiency and boost work productivity.

If companies are the first in their field to discover a breakthrough innovation, they may also enjoy a first-mover advantage in terms of claiming any rights to their innovation. This may be an additional source of revenue. It also improves the reputation of the company as a market leader and innovator. This could be valuable to some companies if they wish to pursue greater public exposure.

Understand the standard of living in a country

By knowing the labour productivity of a country, you can understand the living standards of a country. Labour productivity data is especially helpful when there are several years of data. By analysing the data, you may see a rise or fall in labour productivity over a period of time. It's desirable for a country to experience a growth in labour productivity. This is a good indication of citizens and individuals enjoying a higher standard of living. The reason is that the country can sustain wage increases despite greater competition around the world.

This is important to a company because it helps it understand how to make wage adjustments. A company may align wage increments with the overall economy of the country to maintain a competitive employment package for its staff members. It also helps the company outperform its competitors and create strategies to retain and attract new talent.

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Formulate policies

After gaining an understanding of the standard of living in a country, the government may use labour productivity data to formulate policies. For example, if the government wants to increase labour productivity levels, it may invest in human capital and promote research and development. Policies may be in the form of monetary injections or training and skills development. This affects a company because they may receive more grants or funding to meet the government's developmental goals.

Analysis of the data over time can help a government understand the efficacy of their existing policies. If the policies achieve the goals, aims or purpose, they may continue with the existing measures. Alternatively, if there are other policies that may produce better outcomes, there could be a redesign of government policy to achieve the intended effect on labour productivity.

4 steps to calculate labour productivity

You can use the labour productivity formula to calculate a country's or economy's labour productivity. The labour productivity formula is total output divided by total input. Here are four steps to calculate labour productivity:

1. Determine the relevant period

The first step to calculating labour productivity is determining the period over which you wish to calculate labour productivity. This could be one year, six months or any other period you choose. You may calculate labour productivity over various periods in separate calculations. If you're comparing labour productivity over a period of time, it may be good to use the same period which you used in the previous labour productivity calculations.

2. Obtain the total output for a period of time

Next, obtain the total output over the period you chose. This is typically a sum of money. It could be the value of the goods the company produced. Alternatively, it could be the amount the company earns from providing its services to customers. You may want to use exact figures if these figures are available. If not, you can consider using the best estimate to calculate labour productivity.

3. Find the total input over the same period

Following output data, find the input data over the same period. This is usually the number of hours staff members work to generate the amount of output in that period. Sometimes, you can use the number of employees as the total input for the formula. Each formula analyses a different scenario and you can choose the most appropriate denominator for your purposes.

4. Divide the total output by the total input

The last step is to divide the total output calculated in step two by the total input calculated in step three. The value you obtain from this calculation is the labour productivity. You may want to perform the calculation again using various input and output values or different periods as necessary.

Labour productivity examples

To help you understand how to calculate labour productivity and to use the calculated values to aid decision making, here are some examples you may find helpful:

Example 1

Review this example about calculating staff member productivity for a services company per hour:

Over one year, the company generated $100,000 worth of services. This is the company's output. Over that same period, the number of hours the staff members collectively worked is 2,000 hours. This means that the labour productivity rate is $100,000 divided by 2,000 hours, which is $50 per hour. Therefore, the company generates $50 for every hour in operation.

Calculating staff member productivity per hour may be helpful for a company to determine how much profit they make each hour. If the revenue the company generates each hour exceeds the costs per hour, the company makes a profit equal to that excess. By increasing revenue numbers and reducing costs per hour, the company can earn higher profits. This may lead to company growth and better staff satisfaction.

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Example 2

This example is about calculating staff member productivity for a services company per employee:

Another way to calculate labour productivity is to consider how effectively each employee works. This may be useful if the company wants to find out whether to increase or reduce the number of staff members. It may also affect whether the company wants to increase the skills training of the staff members to raise productivity levels.

Assume the relevant period is one year. The output for the company over that one year is $100,000. There were a total of 150 staff members working to contribute to that $100,000 output. In this example, the input is 150 staff members instead of several hours. You can obtain the labour productivity rate by taking the output number and dividing it by the number of staff members, which is $100,000 divided by 150. This would be roughly equal to $667 which means that each employee produced $667 of revenue for the company in one year.

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