Productivity Benchmarks: How to Calculate the Labor Productivity Equation

This article is a guest post by April Reyes

Productivity refers to the efficiency of a company relative to its production process. To calculate this, you have to measure the output per unit of input. This means dividing the outputs produced by the inputs used during the production. You can quantify output and input according to time, resources, and products. Outputs generally refer to sales and the number of goods produced. Meanwhile, inputs include natural resources, labor hours, and capital.


You can calculate productivity by counting the number of goods produced. Then, you compare this to the number of hours worked by employees. Another way to calculate it is by measuring a company’s net sales. This is then compared to the number of hours worked by each employee. It’s important to note that you can breakdown labor productivity into sectors. This makes it easy to track trends in technology, wage levels, and labor growth.


Business is about growth, and one way to achieve this is through productivity. Since 1947, the business sector has been increasing goods production by nine times. This change is because of an increase in productivity. The well-being of a company, state, or country depends on this increase. Growth in productivity affects Shareholder returns and corporate profit margins. Now, a decline in productivity levels will result in lower profit returns.

We’ll be looking at different ways to calculate productivity. We’ll also be looking at the advantages and limitations of these methods.

Labor productivity equation

Why It’s Important to Measure Labor Productivity

Productivity plays a key role in economic growth and competitiveness. This shows that factors affecting productivity will affect the growth of an economy. The level of productivity of a country affects the quality of life of its citizens.

For example, a TV manufacturing company produces 100,000 television sets in two hours. After a year, the number of television sets produced within two hours increased to 150,000. This means more goods will be available for consumers, and at a more reasonable price.

It’s important to measure productivity to make manufacturing processes better. It also reduces the cost of production and shows you what to change or improve.

A lot of things can affect growth in labor productivity. These include new technologies, changes in physical capital, and human capital. Physical capital refers to the facilities and equipment that workers can use to do their job. Human capital refers to the level of education of the workforce. New technologies refer to tools that increase output and make work easier. These factors help in monitoring the growth of an economy. Let’s say output increases and the number of hours spent on work remains the same. This means that the labor force has become more productive.

To increase productivity, measure the amount of work (input) that each employee does. You must also find positive ways to measure and increase output for each worker.

Related article: How to measure progress towards your long term goals

How to Calculate Productivity

There are several formulas to calculate the productivity of a workforce.

1. Simple Productivity Output Method

This method is a very simple formula that you can apply in different departments. It involves the use of the equation: Productivity = Output / Input

The output is the number of units produced or the number of jobs completed. Input is the number of hours worked or the number of hours put into the production of the units.

Another way to perform the calculation is Productivity = Value of Work / Hours Worked

Measure the value of Work in dollars instead of units.

Example: A television manufacturing company makes 50,000 television sets every month. These TVs are worth $800,000 in total. Also, the total number of hours worked by the employees to produce them is 700 hours.

a. We can calculate productivity by using the first formula. Productivity = 50,000 / 700 = 71 units/hour. This means the company produces 71 television sets every hour.

b. We can decide to use the second formula. Productivity = $800,000 / 700 = $1143/hour. This means the company produces $1143 worth of television sets every hour.

The answers derived from the these formulas are not the same as the profit made. This is because the formulas don’t include things like the cost of operation and employee salary. You should not confuse productivity with profit.

You can apply the Simple Productivity Output Method in different industries. You can also use it to calculate the productivity of a country.

2. 360-Degree Feedback Method


This method tracks productivity by getting feedback from employees about their co-workers. This sounds counter-intuitive, but it can be an excellent tool for assessing productivity. You calculate an employee’s productivity by asking peers, subordinates, and superiors. This is because employees spend most of their time with each other at work. They can give information on how co-workers perform or behave during work hours.


Companies ask employees to rate each co-worker on:

  • How well they’ve accomplished their specific duties.
  • How they’ve contributed to the growth of the company.

Before using this method, each employee should understand the importance of the process. They also need to know what it means for coworkers to be effective and productive at their specific jobs. Asking an employee to give feedback on a co-worker who is in a different department might not be such a good idea. After all, they might not know the level of output required in that department.

This method only works in environments with close-knit team members. The company needs to train its employees on how to give honest evaluations free of prejudice. They have to understand that it’s not an avenue to showcase their dislike or personal bias for a co-worker. It’s a way to make the company better and institute growth.

It’s important to get feedback from several co-workers about an employee’s productivity. This prevents bias or personal grudges from affecting the results.

3. Online Time Tracking and Project Management Software Method

Companies can use time tracking software to track productivity with ease. This is especially useful if you have remote workers in your company. Time tracking software such as Traqq allows a company to track the number of hours worked by an employee. It doesn’t matter where they’re working from. It also monitors what workers are doing during company hours. The company can use this to create performance reports for each worker.

It’s important to note that this method has its limitations. The number of hours spent on work isn’t the only measure of productivity. Productivity also includes how an individual utilizes their hours. It includes the quality of work done during those hours. Some workers generate quality work in a short period. Meanwhile, some employees can work for long hours and achieve very little. Long hours do not always equal high productivity.

4. Social Media Monitoring

Some employers follow their employees on social media platforms to keep an eye on them. This might seem like strange behavior, but it has its merits. If an employee spends their work hours posting on social media, they can’t be very productive. An individual that surfs the Internet when they should be working can’t be productive. In some cases, social media can be a distraction.

Engineers design social media sites to keep users on the Internet for as long as possible. This can be counterproductive if an employee is doing this on company time. You can install software that keeps track of what workers do during company hours. It can monitor the improper use of the Internet and report it to the management.

Related article: Why social media is bad for you

5. Profit with the Right Productivity Method

Business is all about making a profit. After all, what’s the point of running a company if there’s no monetary gain to go with it? While profit is not the same as productivity, you can use it to measure productivity.

Productivity = Profit. This formula works well for businesses in the service/creative field. It measures productivity by the value (profit) an employee brings to the company. This is in contrast to measuring the number of hours an employee spends on work. This encourages workers to focus on working smarter not working longer.

The “team effectiveness ratio” is the outcome of this measurement. It measures the value of gross profit that a company earns for every dollar that they spend on salary. It’s important to note that this method does not emphasize measuring profit against time. Measuring profit against time can overwork your employees. This will have the opposite of the desired effect and lead to decreased productivity.

6. Accomplishment Method

This method measures how much an employee achieves. It doesn’t focus on how long they spend to achieve them. Using this allows companies to focus on the number of tasks completed by each employee. This is in contrast to monitoring how workers spend their work hours.

You can break down projects into milestones or individual tasks. This allows you to track the number of tasks completed by each employee. Each employee gets a set number of assignments to complete based on their level of competence. You can use project management software for this. It allows each worker to be able to tick off tasks for the day, week, or month (as they complete them). This method emphasizes the completion of tasks and not on the number of hours logged per week.

Policies to Improve Labor Productivity

You’ve succeeded in calculating the productivity of your workforce. Now, the question is, how can you improve productivity? These policies, if used the right way, will bring about growth.

Invest in Physical Capital

Increase productivity and lower costs by investing in capital goods and improving infrastructure.

Educate and Train your Workforce

Offer quality training and education to help upgrade your employees’ skills. A skilled workforce is a productive workforce.

Embrace New Technologies

Incorporate technology into your company and making policies to allow for its use. For instance, you can automate mundane tasks. This will give your employees time to focus on other aspects of the job. McKinsey Global Institute reported that this can improve productivity by 20 to 25%. This is especially true for knowledge workers.

Other ways include offering incentives and bonuses, as well as improving working conditions. A happy employee is a productive employee.

Calculating Increase in Productivity

Calculating productivity is one thing. Implementing policies to encourage productivity growth is another. Now, how do you measure to know if the policies you implemented are making a difference?

  • Calculate current productivity with the formula Productivity 1 = Output / Input
  • Improve productivity by implementing policy changes
  • Calculate new productivity after the changes with Productivity 2 = New Output / New Input
  • Subtract Productivity 1 from Productivity 2 (Productivity Improvement = Productivity 2 – Productivity 1)
  • Use the old productivity value to divide the improvement value. After that, multiply the value by 100. This will give you the percentage increase in productivity. (Percentage Increase = Productivity Improvement / Productivity x 100)

Conclusion

There are many ways to measure productivity. Yet, it’s important to consider the job differences when using these formulas. You can use more than one formula to get better results. A single method cannot guarantee accurate results across different sectors.




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