According to a blog post on human resources, labour can account for as much as 70% of a company’s costs [1], so it’s vital business owners are able to track its efficiency. Labour productivity measures this by calculating how much output your labour produces over a specific time period.
In this article, we will explain how to calculate labour productivity, and how the results of this calculation can help your business drive better performance.
How to calculate labour productivity
Labour productivity refers to the volume of products or services a company’s workforce produces in a specific time period, usually an hour. It is usually expressed as the total output per employee, per hour.
When calculating labour productivity you’ll need to know two important numbers: the input (labour) and the output (units of product or service).
For example, Lancashire-based MattressTek sells machines that are used to manufacture mattresses all over the world. When calculating labour productivity, the company measures the number of machines designed, made and installed as the output, while input is the total number of labour hours over the same period.
Labour productivity formula
The formula to calculate labour productivity is as follows:
Labour Productivity = Output Per Period (units) / Labour (units)
Step 1 – calculate output value
To calculate labour productivity, first measure the value of the output, which is the product or service produced by your company. Output should be measured over a time period, which might be per hour, month, or quarter. For example, your company might produce £100,000 of goods over a month, or you might deliver £200,000 of services for clients.
Step 2 – calculate labour time
Next, calculate the number of hours worked by your employees in total, over the time period.
Step 3 – calculate labour productivity
Finally, divide the output by the labour to calculate labour productivity over the period. For fast-growing companies, it may be useful to calculate the labour productivity per employee. This means the business can compare productivity in a month when there are 50 employees and make a like-for-like comparison in a month when there are 100 employees.
To calculate labour productivity per employee, simply divide the total labour productivity figure by the number of employees to generate a per-employee value.
Labour productivity example
Company A makes sports clothing and needs to understand labour productivity in its manufacturing site. In the last month, the company has made £2,000,000 in products. Each month the company pays for 2,000 hours of labour across its 50 employees.
To calculate labour productivity, the company would use the following calculation:
Labour productivity = £2,000,000 (output this month) / 2,000 hours (labour this month) = £1,000
This means that the company produced £1,000 for every hour of labour. We know that the company has 50 employees so the labour productivity per employee is 1000/50, or £20.
The importance of measuring employee productivity
Identify potential issues
Measuring labour productivity means that your business is ready to identify any issues that might trigger a fall in productivity and potential revenues, says Claire McLean, CEO and Founder of consulting firm Realise HR.
“Falling labour productivity can be caused by people issues such as staff shortages or low engagement among employees, but it can also indicate that there is a particular process isn’t operating efficiently,” she says.
MattressTek’s technical director Shaun Peel agrees. “It’s not necessarily that people are being less productive," he says. "More often, it’s an issue with software that might be slowing down production or a process that needs to be improved.”
Better informed pricing
Understanding labour costs means that the company can make informed decisions around pricing, adds Peel. “We use data from timesheets and our ERP software to measure and track productivity and we can then understand exactly how many hours it takes to complete a single customer order,” he says. “This allows us to maintain a healthy profit margin.”
How to boost labour productivity
There is no one 'good' level of productivity, since the amount of labour involved in creating your company’s output will depend on the product or service offered, and the amount of human involvement in that process, says McLean.
She adds that the most common error that companies make when trying to boost productivity is assuming that they only need to make people more productive. “If you want to increase productivity then you need to look at systems, processes and people,” she says.
Boosting productivity might mean mapping your current processes and identifying ways to make things more efficient, perhaps using automation or new technology. It could also mean replacing software systems, or changing up the supply chain because a certain material isn’t arriving at the right time and slowing down production.
Using employee engagement and benefits to boost productivity
Of course, productivity can also relate to your workforce, says McLean. “We know that a company with low employee engagement can see a 19% fall in productivity, so it’s important that your workforce has direction and feels involved in your strategy,” she says.
Tactics that can help to boost engagement and drive productivity should include regular communication to help employees feel informed and involved in the business. McLean also advises taking a fresh look at benefits for employees to ensure you are offering things that workers really value.
MattressTek has boosted labour productivity by focusing on staff retention, in particular keeping skilled workers who are more efficient on the factory line. “The job can be menial and repetitive so we have focused on offering competitive benefits like flexible shifts so people can have better work-life balance and the opportunity for them to work overtime,” says Peel. “We have found that in the current climate it’s something that makes people want to work here, which is great for us in the longer term.”
You could freshen up employee benefits with Membership Rewards® points. The American Express® Business Gold Card enables you to earn one Membership Rewards point for each eligible £1 Card transaction, which can be used by employees to claim a range of rewards, from flights to meals out and shopping vouchers¹. You'll also benefit from longer payment periods of up to 54 days, putting more flex in your cash flow².
1. Membership Rewards points are earned on every full £1 spent and charged, per transaction. Terms and conditions apply.
2. The maximum payment period on purchases for the Business Gold Charge Card is 54 days. If you'd prefer a Card with no annual fee, rewards or other features, an alternative option is available – the Business Basic Card.
Sources:
[1] Paycor, The Biggest Cost of Doing Business: A Closer Look at Labor Costs, 2022
