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.

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Paul Tracy
Paul Tracy

Paul has been a respected figure in the financial markets for more than two decades. Prior to starting InvestingAnswers, Paul founded and managed one of the most influential investment research firms in America, with more than 3 million monthly readers.

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