How to calculate labor productivity
/What is Labor Productivity?
Labor productivity measures how effectively labor resources are converted into output. It compares the amount of goods or services produced to the labor input used, such as hours worked or number of employees. Higher labor productivity indicates that more output is being generated per unit of labor. It is commonly used to assess operational efficiency and support performance benchmarking. Labor productivity trends also inform staffing, process improvement, and cost management decisions.
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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.
FAQs
How does labor productivity differ from labor efficiency?
Labor productivity measures output relative to labor input, such as units produced or revenue per labor hour. Labor efficiency compares actual labor usage to a predefined standard or expected level of labor input. Productivity is generally used for broader performance evaluation, while efficiency focuses on variance analysis and operational control.