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.

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.

• 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 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.

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.

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

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

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

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

• 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.

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.

• An increase in labor productivity would mean the effective use of resources and a lower cost of production. If more units of goods are produced at the same effort, then the overall cost comes down.
• The lower average costs, in turn, will lead to good profits. Since production increase, the revenue increase along with it. But the cost on the other hand comes down. As a result, the profit increases.
• A company with high labor productivity growth will have a competitive edge over other because the cost of production is less and more quality output is produced, putting them in an advantageous position in the markets.
• Employees with better productivity can claim the performance-based benefits provided by the company.
•  Improved productivity also means the overall economic conditions will be improved.

• 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 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.

This has been a guide to what is Labor Productivity. We explain it with formula, how to calculate, example, factors & differences with total productivity. You may learn more about Financing from the following articles –

• Tax to GDP Ratio
• Calculate Direct Labor
• Labor Market
• Labor Intensive Meaning
• Formula for Labor Force Participation Rate