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Study Notes

Labour Productivity

AS, A Level
AQA, Edexcel, OCR, IB

Labour productivity is concerned with the amount (volume) of output that is obtained from each employee.

Why does measuring and monitoring 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 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:

How can a business improve its labour productivity? Here are the main approaches:

  • Measure performance and set targets – it is often claimed that "what gets measured, gets done!"
  • Streamline production processes
  • Invest in capital equipment (automation + computerisation)
  • Invest in employee training
  • Make the workplace conducive to productive effort

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