Measuring the productivity of labour

Although businesses will aim to improve the productivity of all resources, it is usually the productivity of labour that receives the most attention. Workforce productivity is usually measured by assessing changes in the volume or value of output produced in a company.

Labour productivity in a firm can be calculated by dividing output over a given period of time – for example, each day, week, or month – by the number of workers employed. This will give a measure of the average productivity per worker per period.

A number of problems arise when using measures of the average product of labour. For example:

Should all employees be included in the calculation of productivity, including cleaners, management, and admin staff? Or should productivity measures concentrate solely on shop-floor workers?

How can the measure accommodate ‘multi-product’ plants, where the efforts of employees might contribute to the production of more than one product?

How can productivity be measured in organisations that produce services, for example, banks or hairdressers?

In a hair salon we might employ a measure of the number of haircuts per hour, but in many ways the salon will be like a multi-product plant, with some people washing hair, others cutting, applying perms, or cleaning. In this case, a better measure of productivity might be achieved by calculating the value added per worker per period. This simply means dividing total sales revenues net of costs by the number of employees, to find the average net revenue per worker.

Similarly, measuring productivity in organisations where there is no physical output or sales revenue – for example, the NHS, the Civil Service, or an educational institution – also poses problems. Here, clearly, other measures, such as time spent waiting for operations, or meeting deadlines, or numbers of students obtaining qualifications, have to be used.

Why do firms seek to raise productivity?

The performance of a business organisation, in terms of the achievement of certain objectives such as business survival, meeting domestic and international competition, improving profit, expanding market share will depend critically on the level of added value achieved within a firm. If the same amount of resources can produce more output at the same total cost, then the cost of each unit of output will have fallen. Increasing productivity can therefore lower production costs and increase value added. As costs fall, profit margins rise. A business may also pass on lower costs to consumers in the form of lower prices in an attempt to build and ensure repeat sales at the expense of its rivals.

A firm that fails to increase productivity at the same rate as, or faster than, its competitors will face higher costs and lower profits. Prices cannot be reduced without either sacrificing profits or sustaining a loss. If a firm is unable to offer quality products at competitive prices, then demand for its products will fall. In the long run the firm will face closure, and workers will be made redundant. Adding value is essential to the survival of a firm.

Business organisations in the developed countries are facing increasing competition from firms in developing economies, such as China, Malaysia, and Taiwan in South East Asia. Wages in these countries are still very low compared to those received by workers in developed countries.

It is therefore vital that firms in the developed countries increase productivity, reduce unit production costs, and improve product quality in order to compete with overseas organisations and thereby ensure their survival.

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