Labour Productivity

How to calculate labour productivity?

Labour productivity is calculated by measuring the amount of output that an employee is able to produce. This could be measured on an hourly basis in a company that has quite a high output volume, or it might be measured over a specified period of time like a day, a month, or maybe even longer, a year. Labour productivity is therefore calculated by dividing the output produced during a period by the number of employees working during that same period.

Most businesses aim to increase their productivity as this would indicate more units are delivered by the same number of staff or the same quality is delivered by fewer workers and so the cost of labour is reduced.

Labour productivity formula

Labour productivity is calculated by dividing produced output by the number of employees: \(\hbox{Labour Productivity}=\frac{\hbox{Output per period (units)}}{\hbox{Number of employees per period}}\)

Labour productivity examples

Now let's assume that new technology has been developed. What happens to labour productivity?

However, if Company A wants to keep their production levels at 20,000 units per month, they would have to employ fewer employees, as each employee can now produce 600 units/month. Let's take a look at how many employees they would now need to produce 20,000 units per month.

As indicated in the examples of the calculations above, a rise in labour productivity means that the output can rise by using the same number of staff, or less staff can produce the same level of output.

Labour cost per unit

The key thing to consider is how to improve labour productivity. If a business has got lower levels of labour productivity than its competitors, it may leave the business at a unit cost disadvantage so it needs to do something about it. Commonly it's not an easy task as it involves a variety of measures.

One factor strongly linked to labour productivity is labour cost per unit.

Here's the formula labour cost per unit:

\(\hbox{Labour cost per unit}=\frac{\hbox{Total labour cost}}{\hbox{Total level of output}}\)

What would happen to the labour cost per unit if the productivity increases?

As labour productivity increases, the labour cost per unit decreases. Alternatively, the decrease in the labour cost per unit will lead to an increase in labour productivity. Either way, your organization will benefit from lower costs and more competitive prices on the market.

Below are some ways to reduce labour costs and increase productivity:

• Make sure employees are sufficiently trained and know exactly what to do within the organisation.

• Have the correct equipment and facilities in place to ensure that employees are able to do their job properly.

• Enhance skills and attitudes through the additional training of existing employees.

• Improve work ethics, which could mean increasing the involvement of employees in making decisions to improve their motivation and commitment.

• Invest in new technology, as innovation and technological advancements oftentimes increase labour productivity due to more efficient processes.

One problem when trying to increase labour productivity is the resistance from employees, especially if it involves automation. Employees might be worried that their jobs are going to change or disappear due to automation. In order to reduce the impacts of resistance - which could decrease labour productivity - from employees, companies need to make sure to reassure and motivate employees accordingly.