What is labor productivity?
Labor productivity measures the hourly output of a country’s economy. More specifically, it represents the amount of real gross domestic product (GDP) produced per hour of work. Labor productivity growth depends on three main factors: savings and investment in physical capital, new technologies and human capital.
Key points to remember
- Labor productivity measures output per hour of labor.
- Labor productivity is largely driven by capital investment, technological progress and the development of human capital.
- Business and government can increase the labor productivity of workers by investing directly in or creating incentives for increasing technology and increasing human or physical capital.
Understanding labor productivity
Labor productivity, also known as labor productivity, is defined as real economic output per hour of work. Labor productivity growth is measured by the change in economic output per hour of work over a defined period. Labor productivity should not be confused with employee productivity, which is a measure of the output of an individual worker.
How to calculate labor productivity
To calculate the labor productivity of a country, you would divide the total output by the total number of hours worked.
For example, suppose the real GDP of an economy is $ 10 trillion and the total number of hours worked in the country is $ 300 billion. Labor productivity would be $ 10 trillion divided by $ 300 billion, or about $ 33 per hour of work. If the real GDP of the same economy reached $ 20 trillion next year and its working hours increased to $ 350 billion, labor productivity growth in the economy would be 72%.
The number of growth is derived by dividing the new real GDP of $ 57 by the previous real GDP of $ 33. The growth in this number of labor productivity can sometimes be interpreted as an improvement in the standard of living in the country, assuming that it keeps pace with the share of labor in total income.
The importance of measuring labor productivity
Labor productivity is directly linked to improved living standards in the form of higher consumption. As the labor productivity of an economy increases, it produces more goods and services for the same amount of relative labor. This increase in production makes it possible to consume more goods and services at an increasingly reasonable price.
The growth in labor productivity is directly attributable to fluctuations in physical capital, new technologies and human capital. If labor productivity increases, it can generally be attributed to growth in one of these three areas. Physical capital is the tools, equipment and facilities that workers have to produce goods. New technologies are new methods of combining inputs to produce more outputs, such as assembly lines or automation. Human capital represents the increase in education and the specialization of the workforce. The measure of labor productivity provides an estimate of the combined effects of these underlying trends.
Labor productivity can also indicate short-term cyclical changes in an economy, or even a downturn. If production increases while working hours remain static, this indicates that the workforce has become more productive. In addition to the three traditional factors described above, this is also seen during economic recessions, as workers increase their work effort when unemployment increases and the threat of layoffs looms to avoid losing their jobs.
Policies to improve labor productivity
Governments and businesses can improve labor productivity in several ways.
- Investment in physical capital: Increasing investment in capital goods, including government and private sector infrastructure, can help productivity while lowering the cost of doing business.
- Quality of education and training: Providing workers with the opportunity to upgrade their skills and provide education and training at an affordable cost helps to increase the productivity of a business and an economy.
- Technological progress: The development of new technologies, including hard technologies like computerization or robotics and soft technologies like new modes of business organization or pro-free market reforms in government policy can improve productivity workers.