Loading the player...

What is 'Labor Productivity'

Labor productivity measures the hourly output of a country's economy. Specifically, it charts the amount of real gross domestic product (GDP) produced by an hour of labor. Growth in labor productivity depends on three main factors: investment and saving in physical capital, new technology and human capital.

BREAKING DOWN 'Labor Productivity'

Labor productivity, also known as workforce productivity, is defined as real economic output per labor hour. Growth in labor productivity is measured by the change in economic output per labor hour over a defined period. Labor productivity should not be confused with employee productivity, which is a measure of an individual worker's output. 

How to Calculate Labor Productivity

To calculate a country's labor productivity, you would divide the total output by the total number of labor hours. 

For example, suppose the real GDP of an economy is $10 trillion and the aggregate hours of labor in the country is 300 billion. The labor productivity would be $10 trillion divided by 300 billion, equaling about $33 per labor hour. If the real GDP of the same economy grows to $20 trillion the next year and its labor hours increase to 350 billion, the economy's growth in labor productivity would be 72 percent.

The growth number is derived by dividing the new real GDP of $57 by the previous real GDP of $33. Growth in this labor productivity number can usually be interpreted as improved standards of living in the country.

The Importance of Measuring Labor Productivity

Labor productivity is directly linked to improved standards of living in the form of higher consumption. As an economy's labor productivity grows, it produces more goods and services for the same amount of relative work. This increase in output makes it possible to consume more of the goods and services for an increasingly reasonable price.

Growth in labor productivity is directly attributable to fluctuations in physical capital, new technology and human capital. If labor productivity is growing, it can be traced back to growth in one of these three areas. Physical capital is the amount of money that people have in savings and investments. New technologies are technological advancements, such as robots or assembly lines. Human capital represents the increase in education and specialization of the workforce. Measuring labor productivity allows an economy to understand these underlying trends.

Labor productivity is also an important measure of the short-term and cyclical changes in an economy. High-level labor productivity is a combination of total output and labor hours. Measuring labor productivity each quarter allows an economy to measure the change in its output in relation to the change in its labor hours.

If the output is increasing while labor hours remains static, it could be a sign that the economy is advancing technologically and should continue to do so. Conversely, if labor hours increase in relation to flat output, it may be a sign that the economy needs to invest in education to increase its human capital.

Policies to Improve Labor Productivity

There are a number of ways that governments and companies can improve labor productivity.

  • Investment in infrastructure: Increasing the investment in infrastructure from governments and the private sector can help productivity while lowering the cost of doing business.
  • Tax and welfare reforms: Implementing these improve work incentives and increases incomes of people who work more productively. 
  • Quality of education and training: Offering opportunities for workers to upgrade their skills, and offering education and training at an affordable cost, help raise a corporation’s productivity.
  • Business investment: Increasing the size of and consistently upgrading a company’s capital stock by pushing out machines that are aged and less efficient.
  • Tax breaks: Offering incentives for businesses to use clean, efficient and new technology to help increase output.
  • Deregulating markets: Increasing competition to enter the market can lead to greater efficiency and higher productivity.
RELATED TERMS
  1. Labor Market

    The labor market refers to the supply and demand for labor in ...
  2. Department Of Labor (DOL)

    The Department of Labor is a cabinet-level U.S. agency responsible ...
  3. Labor Market Flexibility

    Labor market flexibility is a firms' ability under a jurisdiction's ...
  4. Geographical Labor Mobility

    This refers to the level of freedom that workers have to relocate ...
  5. Lump of Labor Fallacy

    The lump of labor fallacy is the assumption that the quantity ...
  6. Neoclassical Growth Theory

    The neoclassical growth theory is an economic concept where equilibrium ...
Related Articles
  1. Insights

    The Economics of Labor Mobility

    Loosening labor restrictions, which allows for geographic and occupational mobility, has both good and bad effects on a country and its workers.
  2. Investing

    The Secret Sauce Fueling Netflix, Visa, Nike

    Shares of Netflix, Visa, Nike, Celgene and Citigroup are outperforming the market, here's why.
  3. Personal Finance

    The History Of Unions In The United States

    Although the overall power of labor unions may not be what it once was, they still maintain a great deal of influence in the United States.
  4. Investing

    3 Emerging Markets With Bright Prospects

    Learn about emerging and developed Asian markets, their economic machines, and which key factors contribute to real and per capita GDP growth.
  5. Insights

    The History of Labor Day

    When the first Labor Day parade was held in 1882 in New York City, the average worker put in six 10-hour days per week.
  6. Tech

    Coca-Cola and US State Dept Use Blockchain to Combat Forced Labor

    Coca-Cola and the U.S. State Department are using blockchain to combat forced labor in their supply chains.
  7. Investing

    12 Stocks That Can Thrive as Economy Gains Speed: Goldman

    Inflation-protected: these stocks identified by Goldman Sachs should thrive as costs rise.
  8. Insights

    Why GDP Is Not an Accurate Measure of the Economy

    Is gross domestic product (GDP) an accurate measure of the strength or weakness of the U.S. economy?
  9. Investing

    How Will Brexit Affect the EU Employment Market?

    Now that Britain has voted to leave the European Union, how will that decision affect its employment market?
RELATED FAQS
  1. How do companies measure labor supply in human resources planning?

    Find out how and why a company's human resources department would measure labor supply, and what policies would address a ... Read Answer >>
  2. Why are the factors of production important to economic growth?

    Find out why the factors of production are critical for real economic growth, where wages rise and consumer goods costs fall ... Read Answer >>
  3. What are the economic impacts of specialization?

    Read about the economic impacts of specialization and the division of labor, and see why individuals, firms and even countries ... Read Answer >>
  4. What determines labor productivity?

    Examine the two primary components of labor productivity, applied technical efficiency and available capital goods, and learn ... Read Answer >>
  5. How do companies balance labor supply and demand in human resources planning?

    Find out what it means for a company to balance labor supply and demand, and learn how human resources planning can strategically ... Read Answer >>
Hot Definitions
  1. Leverage

    Leverage results from using borrowed capital as a source of funding when investing to expand the firm's asset base and generate ...
  2. Financial Risk

    Financial risk is the possibility that shareholders will lose money when investing in a company if its cash flow fails to ...
  3. Enterprise Value (EV)

    Enterprise Value (EV) is a measure of a company's total value, often used as a more comprehensive alternative to equity market ...
  4. Relative Strength Index - RSI

    Relative Strength Indicator (RSI) is a technical momentum indicator that compares the magnitude of recent gains to recent ...
  5. Dividend

    A dividend is a distribution of a portion of a company's earnings, decided by the board of directors, to a class of its shareholders.
  6. Inventory Turnover

    Inventory turnover is a ratio showing how many times a company has sold and replaces inventory over a period.
Trading Center