Q&A - Explain what is meant by labour productivity and how it can be measured?

Labour productivity is concerned with the amount (volume) of output that is obtained from each employee. It is a key measure of business efficiency, particularly for firms in which the production process is labour-intensive.

Why does labour productivity matter?

• Labour costs are usually a significant part of total costs
• Business efficiency and profitability closely linked to productive use of labour
• In order to remain competitive, a business needs to keep its unit costs down

Achieving high (or higher) labour productivity is not a simple task. Several factors influence how productive the workforce is: e.g.

• Extent and quality of fixed assets (e.g. equipment, IT systems)
• Skills, ability and motivation of the workforce
• Methods of production organisation
• External factors (e.g. reliability of suppliers)

How can labour productivity be measured? The common formula is as follows:

An example of this calculation is provided below: