Business owners, investors and analysts often discuss a company's effectiveness in terms of its productivity. The labor productivity ratio measures the amount of output the business receives from each unit of labor its employees put into their work. Companies can measure their labor productivity ratios as a whole, by department or by job task. Managers can then apply these ratios and assign a _competitive priority _to them to analyze how well they stack up against their competitors.
The first step in measuring the labor productivity ratio comes in determining how to measure output. In a traditional manufacturing setting, the company can measure the output by the number of pieces the employee assembles or handles in her job tasks. For sales staff, management can measure the output by the number of sales or the total dollar amount of sales. For computer programmers, output can be measured by the number of lines of code the programmers generate or the number of specific programming tasks they complete.
The other factor that goes into determining the labor productivity ratio is the amount of input the employee contributes. In most settings, the amount of employee input would be equal to the number of hours the employee works. In some cases, the methods to measure input are not directly related to hours worked. For example, an outside salesperson's measure of input may be the number of cold calls made or the number of appointments booked.
Calculating Labor Productivity Ratio
The calculation method for the labor productivity ratio is simply the amount of output divided by the amount of input. The use of consistent measures for output, input and time allows for an "apples-to-apples" comparison between employees and departments charged with similar job tasks. For an average employee on a factory floor, the output can be 2,000 pieces per week and the input can be 40 hours worked per week. The average labor productivity ratio would be (2,000/40), or 50 pieces per hour. For a salesperson who brings in $300,000 on 20 appointments per month, the labor productivity ratio is ($300,000/20), or $15,000 per appointment.
Uses for Labor Productivity Ratio
The labor productivity ratio can measure the effectiveness of an individual employee, a department, a company or an entire industry. Department leaders can use labor productivity ratios within their department to determine which employees are performing up to expectations. Company management can examine productivity figures to analyze which departments are contributing the most to the bottom line. And investors can see which companies in a specific industry get the most from their workers.
- OECD: Labor productivity Indicators
- U.S. Bureau of Labor Statistics: Incorporation of Hours-Worked Hours Paid-Ratios
- Shmula LLC: Productivity and Efficiency Calculations for Business
- U.S. Bureau of Labor Statistics: Productivity Measures
- U.S. Bureau of Labor Statistics. "Does the Productivity of Individual Workers Increase During Recessions?" Accessed Sept. 17, 2020.
Living in Houston, Gerald Hanks has been a writer since 2008. He has contributed to several special-interest national publications. Before starting his writing career, Gerald was a web programmer and database developer for 12 years.