Reviewed by Sep 30, 2020| Updated on
Labour productivity is a measure of labour output. The productivity is measured in hourly terms. In macro-economic terms, labour productivity measures the real Gross Domestic Product (GDP) produced in an hour through labour. Labour productivity is an essential factor in the overall growth of a business.
The key factors for labour productivity are recruitment and investment in human capital, new technology, and physical capital. Labour productivity is directly related to human capital. Labour productivity can be increased by investing in technological improvements for workers, providing incentives for workers.
The growth in labour productivity is measured on the basis of change in economic output for a labour hour over a defined period of time. For example, if the real GDP of a country is USD 5 trillion and the labour hours put in by workers in the country are 20 billion, then the labour productivity is USD 5 trillion divided by 200 billion which results in USD 25 per labour hour.
Using the above formula, labour productivity can be measured on a year-on-year basis. Also, the growth in labour productivity can be measured by comparing the labour productivity of 2 years. Growth in labour productivity or an increase in consumption levels indicate an improvement in the standards of living.
With an increase in labour productivity, more goods and services are produced for an increased demand for consumer goods and services. Labour productivity grows with a positive interaction between investment in human capital, new technologies, and physical capital.
An increase or decrease in labour productivity can also be indicative of cyclical or short-term changes in the economy. Labour output also increases in a recessionary phase when workers work extra to avoid job losses.
However, even in a steadily growing economy, companies invest in upgrading the skills of their employees, new technologies to increase labour productivity to contribute to the profits and growth of the company.