How to calculate labor productivity
/What is Labor Productivity?
Labor productivity measures the efficiency of the people in a country or organization. It is a key indicator of the ability of a business or country to increase its profits or individual income, respectively.
As a workforce gains in experience, its labor productivity will generally increase. Conversely, as more experienced people are replaced by new ones, the productivity level tends to fall. Thus, employee turnover can have a pronounced negative effect on labor productivity.
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Formula for Labor Productivity
To calculate labor productivity, divide the total value of the goods and services produced by the total number of hours worked. If productivity is being calculated for an organization, the total value of goods and services is considered to be their monetary value - that is, the amount at which they can be sold. This amount does not necessarily equate to the cost of goods sold, since a portion of the amount produced could be stored in ending inventory, rather than being sold. Thus, the calculation for an organization is:
Monetary value of goods and services produced ÷ Total number of hours worked
= Labor productivity
This measurement can be tracked on a trend line to see if there are any changes in labor productivity over time.
How to Enhance Labor Productivity
Labor productivity can be improved in several ways, as noted in the following bullet points:
Offer training. You can require employees to engage in targeted training that will increase their efficiency.
Enhance processes. You can streamline processes to strip out non-value-added activities, which increases their efficiency.
Automate. You can invest in automation, which strips labor hours out of the denominator of the labor productivity calculation, yielding a much higher labor productivity number.
How Labor Productivity is Used at the National Level
At the national level, labor productivity is calculated as gross domestic product divided by the aggregate number of labor hours worked in the country. As this number increases, it is presumed to reflect an increase in the standard of living within the country. The measure is commonly compared among different countries, in order to rank them by productivity level.