What is labour productivity?
Labour productivity shows businesses how many products or services are produced by their employees within a specific period of time. This shows how efficiently employees are working within the timeframe selected. Labour productivity is often measured by output per worker.
For instance, a clothing manufacturer produces skirts for fashion retail outlets. Company A has 25 employees who sew 275 skirts each week. Each employee will sew 11 skirts each week. Company B on the other hand only has 17 employees and is able to sew 221 skirts per week. Each employee will be able to make 13 skirts each week.
| Company | Number of employees | Skirts produced each week | Number of skirts produced by each employee |
| Company A | 25 | 275 | 11 |
| Company B | 17 | 221 | 13 |
Although Company A is able to produce more skirts each week, the employees in Company B are working faster to sew the skirts. This means that Company B will have lower labour costs to make each skirt. For instance, if each employee at both companies is paid £384 per week, Company A will pay £34.9 (£384/11)in labour costs per skirt whereas Company B will pay £29.5 (£384/13). This will make Company B more competitive as they will have higher profit, or the option to lower their prices.
Businesses will try to improve their labour productivity results. To do this, they will track the results over time to see how many units each employee is producing. If the business finds employees are producing less, they will take action to try to improve the outcome or result.
The importance of labour productivity
Labour productivity can have strong uses in the organisation. However, it does also have some limitations that need to be considered and monitored.
Uses of labour productivity
- Labour productivity can be a good way to find groups of employees, teams or departments that are the most efficient. For instance, teams can be compared with each other by measuring the labour productivity for both of them. Their tasks and the equipment used to complete the task need to be the same for an accurate comparison. The one with the highest labour productivity might be working more efficiently.
- Increased labour productivity can result in lower labour costs. Businesses can then make higher profits or reduce prices. This could potentially lead to a higher competitive advantage.
Limitations of labour productivity
- Although labour productivity might increase, and employees produce more products within a specified timeframe, the quality of the products might decrease. Employees might work quickly to produce more but in so doing be careless resulting in a lower quality product.
- Competitive advantage might be lost if the competition also increases labour productivity in their organisations. The competition could also lower their prices to match.