Labor Productivity Definition Formula How To Calculate

Labor Productivity Definition

Labor Productivity Formula

Productivity for a worker can be calculated using the following formula.

Labor Productivity = Value of Goods & Services Produced / Input Man Hour

The result will provide the productivity per hour.

You are free to use this image on you website, templates, etc., Please provide us with an attribution linkHow to Provide Attribution?Article Link to be HyperlinkedFor eg:Source: Labor Productivity (wallstreetmojo.com)

How to Calculate Labor Productivity?

Example of Labor Productivity

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.

Calculate the Value of Goods and Services Produced This step involves calculating the money value of goods and services produced or rendered by an employee during the given period. Value means such value at which those goods or services will be sold. Identify Input Man Hours Input person-hours mean the total number of hours taken by the employee to produce the goods or render the service. Divide and Calculate the Result The last step is to divide the value of goods and services produced with input man-hours. The resultant figure will provide productivity per hour for an employee.

This step involves calculating the money value of goods and services produced or rendered by an employee during the given period. Value means such value at which those goods or services will be sold.

Input person-hours mean the total number of hours taken by the employee to produce the goods or render the service.

The last step is to divide the value of goods and services produced with input man-hours. The resultant figure will provide productivity per hour for an employee.

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.

Factors

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

Training

Level of training influences labor productivity. If proper training is provided to the workers, productively is expected to increase.

Overtime

If the workers are subjected to overtime hours, the productively will be negatively impacted as the workers will feel tired and lethargic.

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.

Inputs Used

If a worker uses raw materials or defective machinery, the worker’s productivity will be affected.

Labor Productivity vs Total Factor Productivity

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. No other factors of input are considered apart from input time.

Total factor productivityTotal Factor ProductivityThe total factor productivity (TFP) is a number that showcases the productivity of a business by determining how much it produces versus what it needs to spend to achieve that result.read more means the production level in terms of the weighted average of two inputs, namely, labor and capital. It is calculated by dividing the total production by the weighted average of time and capital. Thus, total factor productivity considers the effect of two inputs – labor and capital.

Importance

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. It also indicates an improved standard of living in case of increased consumption levels.

Benefits

Increased productivity would mean the effective use of resources and a lower cost of production.The lower average costsAverage CostsAverage cost refers to the per-unit cost of production, calculated by dividing the total production cost by the total number of units produced. In other words, it measures the amount of money that the business has to spend to produce each unit of output.read more, in turn, will lead to good profits.A company with high labor productivity will have a competitive edge over others.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.

Limitations

This concept does not consider the effect of other inputs such as capital.Further, the productivity may be affected by many other factors such as the condition of types of machinery used, which are not considered.

Conclusion

The concept of labor productively is used on a business level and a country level. The concept is being widely used by economists around the globe and is very useful.