# Labor Productivity: What It Is, Calculation, and How to Improve It

> **Definition**
>
> Labor productivity is a measurement of real GDP and aggregate work hours in an economy.

## What Is Labor Productivity?

Labor productivity is a measure that compares economic output against the amount of labor required to produce that output.

Labor productivity is often used to calculate the amount of real gross domestic product (GDP) produced by an hour of labor. Growth in labor productivity depends on three main factors: savings and investment in physical capital, new technology, and human capital.

### Key Takeaways

*   Labor productivity calculates economic output based on labor.
*   The most common measure of labor productivity is real gross domestic product per hour of labor.
*   Labor productivity is primarily driven by investment in capital, technological progress, and human capital development.
*   Businesses and governments can increase labor productivity by investing in technology, physical capital, or human capital.

![Labor Productivity](https://www.investopedia.com/thmb/CP7HiTMgB-uXH3QqJIo0Y4UUzeE=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/labor-productivity.asp-final-2c0d23a4f3544122969aacf8ef94ed49.png)

*Labor productivity corresponds with improved standards of living. — Investopedia / Paige McLaughlin*

## Understanding Labor Productivity

Labor productivity measures economic output for a given amount of labor. Growth in labor productivity is measured by the change in economic output per unit of time over a defined period.

Labor productivity is also known as workforce productivity. However, as a macroeconomic measurement, it should not be confused with [employee productivity](https://www.investopedia.com/terms/r/revenueperemployee.asp), which is a measure of an individual worker's output.

## How to Calculate Labor Productivity

To calculate a country's labor productivity, you would divide the total output by [the total number of labor hours](https://www.investopedia.com/terms/m/manyear.asp). 

For example, suppose the real GDP of an economy is $10 trillion and the aggregate hours of labor in the country is 300 billion. The labor productivity would be $10 trillion divided by 300 billion, equaling about $33 per labor hour. If the real GDP of the same economy grows to $20 trillion the next year and its labor hours increase to 350 billion, the economy's growth in labor productivity would be 72%.

The growth number is derived by dividing the new real GDP of $57 by the previous real GDP of $33. Growth in this labor productivity number can sometimes be interpreted as improved standards of living in the country, assuming it keeps pace with labor's share of total income.

## The Importance of Measuring Labor Productivity

Labor productivity is directly linked to improved standards of living in the form of higher consumption. As an economy's labor productivity grows, it produces more goods and services for the same amount of relative work. This increase in output makes it possible to consume more of the goods and services for an increasingly reasonable price.

> **Fast Fact**
>
> Growth in labor productivity is directly attributable to fluctuations in physical capital, new technology, and human capital. If labor productivity is growing, it can usually be traced back to growth in one of these three areas.

Physical capital includes the tools, equipment, and facilities that workers have available to use to produce goods. New technologies are methods of combining inputs to produce more output, such as assembly lines or automation. Human capital represents the increase in education and [specialization](https://www.investopedia.com/terms/s/specialization.asp) of the workforce. Measuring labor productivity gives an estimate of the combined effects of these underlying trends.

Labor productivity can also indicate short-term and cyclical changes in an economy, possibly even turnaround. If the output is increasing while labor hours remain static, it signals that the labor force has become more productive. In addition to the three traditional factors outlined above, it has been theorized that during economic recessions or periods of possible job insecurity, workers increase their labor effort when unemployment rises and the threat of lay-offs looms.

## Policies to Improve Labor Productivity

There are several ways that governments and companies can improve labor productivity:

*   **Investment in physical capital**: Increasing investment in capital goods, including [infrastructure](https://www.investopedia.com/terms/i/infrastructure.asp), from governments and the private sector can help productivity while lowering the cost of doing business.
*   **Quality of education and training**: Offering opportunities for workers to upgrade their skills and offering education and training at an affordable cost can help raise the productivity of both businesses and the overall economy.
*   **Technological progress**: Developing new technologies—including hard technology like computerization or robotics and soft technologies like new modes of organizing a business or free market reforms in government policy—can enhance worker productivity.

## What Does Labor Productivity Mean?

Labor productivity shows how much is required to produce a certain amount of economic output. It can be used to gauge growth, competitiveness, and living standards in an economy.  

## How Do You Measure Labor Productivity?

Labor productivity is measured using real GDP and aggregate work hours in an economy. Real GDP is divided by aggregate work hours to reveal labor productivity.

## Why Is Labor Productivity Important?

Labor productivity is an important measure because it indicates the amount of economic output generated per unit of labor. A higher measure of labor productivity is ideal, as it means that a greater number of goods and services can be produced in a fixed amount of time.

## The Bottom Line

Labor productivity is a measure of economic output per unit of labor. Most often, labor productivity is measured in terms of real gross domestic product per hour of labor. Businesses and governments alike aim to increase labor productivity. This can be achieved through investments in physical, technological, and human capital.

> **Article Sources**
>
> 1.  U.S. Bureau of Labor Statistics. "[Does the Productivity of Individual Workers Increase During Recessions?](https://www.bls.gov/opub/mlr/2014/beyond-bls/does-the-productivity-of-individual-workers-increase-during-recessions.htm)"