How to Calculate Labor Productivity
Labor productivity is a measure of economic performance that compares the amount of goods and services produced (output) with the number of labor hours used in producing these goods and services. It is defined as the ratio of output to labor hours. Higher labor productivity indicates that fewer labor hours are needed to produce a given amount of output.
Here’s the basic formula to calculate labor productivity:
Labor Productivity = Output / Labor Hours
Here’s how to use this formula step-by-step:
- Determine Output: Output is typically measured in terms of revenue, but it can also be measured in terms of the number of units produced. For example, if a factory produced 1000 widgets in a given period and each widget is sold for $10, the total output would be $10,000.
- Determine Labor Hours: Labor hours is the total number of hours worked by employees during a given period. If you had 10 employees who each worked 40 hours in a week, the total labor hours for that week would be 400 hours.
- Calculate Labor Productivity: Divide the output by the labor hours to get labor productivity. Using the above example, if the output (revenue) is $10,000 and the total labor hours are 400, the labor productivity would be $10,000 / 400 hours = $25/hour.
This means that for every hour of labor, $25 worth of goods is produced.
By tracking labor productivity over time, a business can measure how efficiently its employees are working. If labor productivity is increasing, it means that employees are becoming more efficient and the business is getting more output for each hour of labor. Conversely, if labor productivity is decreasing, it means that employees are becoming less efficient.
Example of How to Calculate Labor Productivity
Let’s say you own a furniture company that makes handcrafted tables, and you want to measure your labor productivity for the month of May.
- Determine Output: Let’s say that your company produced 60 tables in May, and each table is sold for $500. So, your total output (revenue) for May is 60 tables * $500/table = $30,000.
- Determine Labor Hours: Suppose you have 5 craftsmen working for you, and each of them worked 160 hours in May (40 hours per week for 4 weeks). So, the total labor hours for May is 5 craftsmen * 160 hours/craftsman = 800 hours.
- Calculate Labor Productivity: Now, you can calculate labor productivity by dividing the total output by the total labor hours. So, your labor productivity for May is $30,000 / 800 hours = $37.5/hour.
This means that for every hour of labor in May, your company produced $37.5 worth of tables. Tracking this number over time can help you measure how effectively your company is using its labor resources, and identify opportunities for improving productivity.
