Productivity measures the efficiency of a company's production process. It is calculated by dividing the outputs produced by a company by the inputs used in its production process. Common inputs are labor hours, capital and natural resources, while outputs are generally measured in sales or the amount of goods and services produced. Productivity can be calculated by measuring the amount of units produced relative to employee labor hours or by measuring a company's net sales relative to employee labor hours.
Calculating Labor Productivity
Overall employee labor productivity is calculated by dividing the goods and services produced by the total hours a company's employees during a certain period of time. For example, suppose a manager wants to calculate the productivity of all the employees at his company. The manager calculates that the company had an output of 30,000 units last month, while its input was 3,000 hours of labor. The productivity for the company is 10 (30,000 divided by 3,000); this means the employees produced 10 units per hour in the previous month.
Measuring Productivity Using Total Sales
Another common way to measure a company's labor productivity level is to divide the total sales by the total amount of hours worked. For example, company ABC had net sales of $15 million and its employees worked a total of 20,000 hours over the last fiscal year. The output is the company's net sales and the input is the number of hours. The productivity of the company is $750 ($15 million divided by 20,000). This means for each hour of labor, company ABC's employees produced $750 in sales.
(For related reading, see: Why is productivity an important concept in economics?)