What Is the Labor Productivity Formula?

February 13, 2023

Have you ever wondered—how productive is your business, really? Or what about the country as a whole? How productive is the United States? When you’re questioning whether your own labor or the labor of your employees is truly bringing about change, you can refer to the labor productivity formula, which helps countries calculate their productivity and see how much is accomplished by an hour of work. If you or a coworker are highly motivated by numbers and improved statistics, consider using the formula in order to help set goals and increase your capabilities.

Definition

The labor productivity formula specifically measures how effective a country’s economy is. To calculate your country’s labor productivity, you’ll divide the total amount of output by the number of hours employees are working. Investopedia uses the following 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.”

You can technically use this same formula to determine labor productivity within your own company. 

Why does the labor productivity formula matter?

When we take a step back and look at the economy as a whole, it’s easy to see how increased labor productivity benefits the population. When labor productivity rises, it enables the price of goods to remain low. Every person’s dollar stretches farther with improved labor productivity. This also means the cost of living stays lower for a longer period of time. This is because the same amount of work is producing more value.

How to increase labor productivity

Are you interested in increasing the labor productivity within your own company? Curious to know how the overall economy works to increase labor productivity over time? Investopedia identifies three main things that help workers produce increased value in the same amount of time. 

“Growth in labor productivity is directly attributable to fluctuations in physical capital, new technology, and human capital. If labor productivity is growing, it can usually be traced back to growth in one of these three areas.” 

What does growth in these areas look like? Consider your own company as an example. When it comes to physical capital, you’ll want to think about tools—like software, equipment, and raw materials—that can make labor more efficient for your workers. Investing in something like Timerack’s time tracking equipment allows your workers to do less than they were doing before. This means instead of filling out paperwork, clocking in and out, and doing payroll tasks by hand, your employees can be spending their time doing more productive things that create value within your company!

New technology is similar to physical capital in that it achieves the same effect: saving your employees time. If your company introduces automation practices, then you’re adding new technology to your company which increases the labor productivity overall.

Lastly, consider human capital. Human capital is the effectiveness of each individual worker within your company. How can you make a person’s effectiveness increase? Often, this occurs by helping them achieve higher education and learning or developing new skills. Then, these people can spend their time adding value to the company in new and more efficient ways.

How does labor productivity affect your workplace? Can you think of areas where your labor productivity can improve? Determine which tactics you will use to achieve these improvements. 

Timerack offers time tracking software that can help with your staffing and recruiting needs.