Understanding How to Calculate Labor Productivity

by | Jul 19, 2021

For most people, labor productivity or workforce productivity is a confusing catch-all phrase that describes economic output. It is intended to offer a window into the performance of the labor force, and is sometimes used interchangeably with things like the employment rate, national economic growth, and annual gross domestic product.

For individual employers, however, the labor productivity formula is a very real, very practical measure of how much value their employees are delivering for the cost.  Labor productivity is calculated by dividing the total value of an organization’s outputs by the work hours that were required for their production.

Large companies with many employees can apply this formula to better understand the ROI of their labor expenses, and offer clues as to how they can increase efficiency and profitability.

Before going into detail on how companies can improve labor productivity, they need to make sure that they are using the correct labor productivity measures in their analysis, so this guide will explain how to account for business-specific considerations in order to calculate pemployee productivitypp.

Make the most of your hourly labour. Book a free consultation with Axsium workforce management consultants today.

How to Calculate Productivity

pen and calculator on paper calculating labor productivityBroadly speaking, employee productivity is measured by dividing the total monetary value of the work performed (i.e. units produced, goods sold, services rendered)by the total work hours spent on those tasks. From a theoretical standpoint, labor productivity is a relatively straightforward notion, but calculations often get far more complex in practice.

Why? Because this traditional labor productivity equation does not take into account the nuances of a given business’ operations, such as the constraints caused by a production process or how to account for the constant interruptions that take place in most customer service jobs.

As a result, companies are always looking for better ways to calculate their labor productivity. Some of the more popular methods include:

Using Sales Data to Determine Productivity

This approach uses basic benchmarks such as input factors, the company’s net sales and total hours worked to determine an employee’s productivity. Essentially, it asks “how much revenue was generated by the goods and services produced in a certain time frame?” The answer is the company’s labor productivity.

Performance & Time Tracking

Depending on the business sector, it can make more sense for a company to examine their productivity per labor hour based on more than just sales, but from the data gathered by digital aids like project management software and online time-tracking platforms.

Whereas traditional labor productivity calculations fit well in mass manufacturing environments, they aren’t a great fit for service providers, especially now that many office staff work remotely.

Calculating Employee Labor Productivity

Labor productivity measurements can be focused on either the company as a whole or individual employees. Here’s an example:

Company X produced $65,000 worth of widgets from 800 labor hours in a week. To calculate their labor productivity, we take their total outputs ($65,000 total value) and divide it by their inputs (800 hours of labor), which gives $65,000 / 800 = 81.25. In other words, Company X’s employees generate $81.25 per hour.

Looking at the other side of the coin, calculating productivity can also be framed from the perspective of individual employee contributions. Using the same Company X example, instead of using the total hours worked, the calculation would use the number of employees. So, if Company X counts 20 employees, their employee labor productivity can be expressed as $65,000 (monetary value of widgets) / 20 (number of employees) = $3,250 (value per employee).

Measure Productivity Effectively

image of a ball covered in binary data floating over open hand

When it comes to company performance, understanding the quality of labor productivity often has more important impacts than simply measuring quantity. Measuring and improving labor efficiency is what will ultimately help companies fare better in competitive markets.

To find labor efficiency, labor levels need to be compared to a benchmark that gives decision makers a realistic baseline, so they can compare the current productivity level with the standard output produced per unit of time. To apply this measure in practice, divide the standard hours required to achieve a benchmark by the total number of hours input, and multiply the result by 100.

For example, if a company has a benchmark set of 40 minutes for a particular task, but employees are on average taking 55 minutes, the labor efficiency calculator would look like this: (40 / 55) x 100 = 72.7% efficiency.

Industry-Specific Labor Productivity Measures

manufacturing industry worker welding components

Labor productivity calculations can be adapted to suit any company in any industry, so long as decision makers are using appropriate inputs and outputs.

Retail 

Determining labor productivity in a retail context, such as in a high-touch apparel boutique, requires measuring several different outputs, including the number of sales  made, average transaction size, conversion rate, , and the total value of those transactions.

Hospitality & Services 

It is notoriously difficult for service sector companies to get accurate measures of their labor productivity because so much of the revenue generated is determined prior to arrival. There are of course jobs where productivity is easier to measure (i.e. housekeeping), but other roles have many abstract and intangible elements. Although quantity remains important, the quality of services usually has a greater role to play in performance reports for the hospitality sector. 

Axsium can help your team better understand these more abstract data points, helping to unearth areas ripe for improvement and provide data-driven strategic advice.

Healthcare

In healthcare, positive patient outcomes and experiences are the desired output, so patient satisfaction must factor largely into productivity calculations. That said, the right kind of quantifiable data is necessary for this calculation to be useful. At Axsium, we help organizations of all sizes zero-in on the data points most pertinent to their industry, quantifying the link between employee productivity, customer satisfaction, revenue, the bottom line, and other less tangible success measures.

Public Sector

Given the complexities of public sector activities (and especially the lack of market transactions to garner data), measuring labor productivity takes on new challenges. Around the world, there are many different methods used to determine public sector productivity, ranging from “macro” approaches that look at the public body as a whole, to “micro” approaches that examine productivity from the employee or task level. Axsium has worked with public sector firms focused on transportation, energy, education, healthcare, and municipal/local services.

Quick Tips to Improve Productivity

image of lightbulb figure plugging itself in

Calculating labor productivity is one thing, but with labor often being the single largest expense on a company’s P&L, finding ways to increase productivity and efficiency is the ultimate goal. To help get there, here are a few simple things that can be easily implemented in any company.

Set Productivity Goals 

If you were running a race, how fast would you go if you couldn’t see whether you were ahead or behind your competition? That’s the same conundrum faced by employees without clear goals and guidelines. Most employees thrive in a setting where they know where they are going and how to get there. Setting ambitious (yet realistic) goals will help your team make better use of their time. This can be done at an hourly or daily level, but the most effective way to communicate productivity expectations is at the task level. How long should a customer transaction take? How much time should setting up an in-store display take? These are meaningful numbers that give employees a clear target to shoot for.

Provide Employees With Feedback & Encouragement 

It’s easy for managers and other decision makers to forget about the importance of employee morale. With so much time spent on productivity calculations and analysis, the mental and emotional condition of the workforce does not get its due. Positive feedback and encouragement, based on the task or project at hand, can go a long way to boost morale and productivity. This can be nicely facilitated by mobile employee-facing applications that reinforce and reward strong performance, while nudging employees in the right direction when they slightly miss the mark.

Invest in Equipment & Training

If you want to get the most from your employees, give them what they need to perform at their best. This means soliciting feedback on the systems and tools they believe will help them on a daily basis and finding ways to make them a part of your operation. This will show your workforce that you listen to their concerns and want to assist in their success, not simply demand productivity. 

Hire Workforce Management Consultants

If you aren’t sure where to begin to improve your company’s efficiency, or you’re simply too busy keeping the lights on to take on such a large-scale project, consider leveraging the expertise of workforce management consultants

With proven methodologies and proprietary tools, Axsium’s services cover the full spectrum of your organization’s workforce management needs and we can help your company develop a holistic strategy for increasing employee productivity.

Never miss an update!

Sign up for our WFM Newsletter for all the latest trends, insights, and expertise from Axsium.

Contact

NORTH AMERICA
1-888-AXSIUM1
+1 (416) 849-5400

EMEA
+44(0)1213681376
+1 (416) 849-5400

APAC
+61 (0) 3 9674 7312