What is Labor Productivity?

Labor productivity measures the hourly productive output for a country's economy during a period of time.

How Does Labor Productivity Work?

A country's labor productivity is a function of technological innovation, labor resources and capital investment.

The formula for labor productivity is:

Labor Productivity = Total Output / Total Productive Hours

Gross domestic product (GDP) is generally used as the measure of total output.

For example, suppose a country's total output for 2010 was $5 trillion. All members of its labor force worked a total of 100 billion productive hours for the year. Labor productivity is found by dividing $5 trillion by 100 billion productive hours:

= $5 trillion / 100 billion hours

= $50 per hour

The country's labor productivity for 2010 was $50 per hour.

Why Does Labor Productivity Matter?

Economic analysts and policymakers compare a country's labor productivity from period to period as a measure of output efficiency. An upward trend in labor productivity suggests a rising cost of living.

Labor productivity is also compared among different countries to determine which are more or less productive than others.