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Labor Productivity: Definition & Equation

Labor Productivity: Definition & Equation
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Lesson Transcript
Instructor: Shawn Grimsley
Labor productivity is a key indicator of a successful business and economy. In this lesson, you'll learn what labor productivity is and how to calculate it.

Labor Productivity Defined

Labor productivity is a measure of how much value a business can create with its workforce. You can view labor productivity from two different standpoints. A business views productivity as the degree to which an employee's efforts result in units of production. In other words, labor productivity depends on how much value was created by the employee per hour of his work, either by producing widgets, selling widgets, or providing some sort of service.

Now, let's ratchet this concept up a bit to the general economy. Economists will calculate the labor productivity of an entire country to determine the productivity of its economy. Governments will find this data useful as one metric to compare its relative economic strength to other countries. Of course, we can actually expand this concept to the entire global economy.

Equations for Determining Labor Productivity

Labor productivity can be measured as a ratio of the total output (goods or services) in dollars to the number of man-hours to produce the output. You can also measure labor productivity as the ratio of total output to the number of workers used to produce the output.

Let's take a look at each equation.

Labor Productivity = Total Output / Total Man-Hours

Let's say that your company produced $50,000 worth of product in one week utilizing 1,000 man-hours. What is your company's labor productivity?

Labor Productivity = Total Output / Total Man-Hours
Labor productivity = $50,000 / 1,000
Labor productivity = $50

Your company generates $50 per man-hour.

Now, let's take a look at the other equation:

Labor productivity = Total Output / Number of Workers

Imagine that you run a company with 50 employees and they produce $125,000 of products in a week. How productive are your employees?

Labor productivity = Total Output / Number of Workers
Labor productivity = $125,000 / 50
Labor productivity = $2,500

Each employee produced $2,500 in value for your company during the week.

Let's take one more example. This time, we'll be analyzing data from a fictional country.

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