Labor productivity is defined as the output that every employed person creates per unit of time.
What is Labor Productivity?
Labor productivity is also referred to as workforce productivity and is a measure of a company or an industry. It measures the hour the output of countries’ economies. It is one of the crucial tools to measure the amount of real GDP, which is produced every hour by typical labor of the country or the company.
Labor productivity is measured in terms of change in economic output for the labor per hour over a specifically defined period. Labor productivity and employee productivity are different terms and should not be confused with each other. Employee productivity is a measure of individual workers’ output.
Labor productivity is directly proportional to the output of the organization. If labor productivity is increased, it enables the company to produce the same output with fewer workers. Therefore, the number of workers is inversely proportional to labor productivity.
Labor productivity has a significant impact on economic growth as well as the standard of living.
Importance of Labor Productivity Measurement
The standard of living of people is directly related to labor productivity. As labor productivity increases, more and more goods and services are produced in the same amount of work. This ensures that the number of goods and products increases and becomes available to customers.
This is because there is an increase in output. When human capital, technology, or physical capital increases, it directly affects labor productivity, which increases in itself. Usually, the growth enabled productivity can be traced back to one of these areas.
Therefore if either of the three increases, it increases labor productivity. For example, if tools and equipment are increased for the person, and the output increases, physical capital is directly proportional to labor productivity. An increase in human capital or specialization workforce also increases activity.
Stable productivity can indicate an economic turnaround. If, for example, the output increases while the labor hours remain the same, then it can be said that the labor force is becoming more productive. On the other hand, in times of an economic recession, workers increase their labor efforts because unemployment is on the rise. The efforts are increased because of an imminent threat of lay-offs.
Calculating Labor Productivity
To calculate labor productivity, you have to divide the total output by the total number of labor hours.
For example, consider that the GDP of an economy is about a hundred trillion dollars and the total aggregate labor hours are about 3000 billion. Labor productivity can be calculated as
three hundred trillion divided by 3000 billion, which is about $33 per labor hour.
If the GDP of the economy grows to $200 trillion in the next year, and the labor hours are increased to about 3500 billion, then the growth in labor productivity would be about 72%.
Improving Labor Productivity
1. Increase in Physical Capital
For any company, physical capital translates to equipment, buildings, land, etc. Many companies have adopted technologies for the benefit of the organization. New, improved machinery, more area for production and storage, faster equipment, etc. are used to improve the production.
However, it is essential to determine if the increase in physical capital has resulted in improvements in the organization’s efficiency and productivity. It is equally important to determine if the asset purchase has resulted in increased profitability as well.
When it comes to analyzing the adoption of improved and increased physical assets, two things should be determined. The first is cost efficiency, and the second is technical efficiency. Cost efficiency is the lowest cost per unit output, which the organization aims to achieve, and technical efficiency is the ability to produce outputs for given levels of inputs.
It is essential to return the benefits of the asset that you purchase so that it can justify the cost—the difference in productivity before and after the purchase of as it is to be calculated and compared. However, as the organization expands, you can expect the per-unit labor costs to reduce as well as the output is increased.
If the organization experiences that even after expansion and increase in physical capital, productivity is the same, then there could be potential problems with labor, which have to be analyzed. Thus labor productivity is an important indicator.
2. Resource Allocation
The existing allocation of productivity is to be analyzed and determined. Are the laborers being utilized following the expectations of the organization? If not, then what can be done to improve it? Only after answering all of these questions can you expand the discussion for including all the inputs. Farms must use the optimal input combination as the production increases.
The existing resource can be of valuable use if it is allocated property. Unmonitored and arbitrary use of resources can lead to not only an increase in costs but also reduce labor productivity.
The first thing is to analyze if enough resources are present for every labor. The second thing to analyze is if any labor is getting excess resources. Optimizing the available resources for all the laborers will also help to increase productivity. It will also help to reduce costs and resource conservation.
3. Increase in Human Capital
The skills and knowledge of the organization are represented by human capital. Skills can be acquired by different methods like education, training, and experience.
The managers and operators must assess the skills concerning their current management skills and gaps. These gaps should be filled as soon as possible with the help of the required training or experience. Many checklists can provide a list of necessary skills. Skills can be related to production, financial management, strategic management, relation management, etc.
The skills which are required for a particular organization can be acquired by different means as well. Different organizations will require different skills, and employees must analyze the skills’ requirements and fill them appropriately.
Sometimes companies hire other people to fill the gaps in the skills. Companies should also offer existing workers to upgrade their skills. Training existing employees and retaining them is cheaper than hiring new employees.
4. Technological Changes
These are the crucial factors when it comes to getting a higher market share and increasing profitability. Adopting technological changes is essential since the organization which does not implement technological change becomes obsolete. However, the disadvantages of technology must be taken into consideration before implementing it.
The carbon footprint should be reduced to a minimum, and pollution levels should be at the lowest. If some unavoidable things need to be done, the organization can compensate by doing something eco-friendly. For example, Having solar-powered things will improve the organization’s carbon footprint.
Labor productivity determines the output per worker. Labor efficiency and productivity can be increased and improved by examining per unit costs and making relevant input adjustments.
The adjustment can be in terms of physical capital like labor, capital, or other components or even by increasing employees’ numbers. Even increasing the number of human capital per worker also improves labor productivity.
Adopting new technology is directly proportional to labor productivity. While increasing labor productivity, the company should also take into consideration other factors such as operating profit margin, asset turnover ratio, net profitability, etc.