What is Labor Productivity?

Labor productivity is a measure of a country's economic output (real Gross Domestic Product) that is the result of a single hour of labor. Labor productivity is heavily affected by expenditure on physical capital, technology, and human capital.

How is Labor Productivity Used?

Labor productivity has a direct link with improved standards of living in terms of higher consumption. As far labor productivity of an economy grows, it produces a higher number of goods and services for the exact relative work amount. This output increase enables the consumption of more goods and services for a more reasonable price. Growth in labor productivity is directly ascribable to fluctuations in new technology, human capital, and physical capital. If labor productivity is increasing, it can be traced back to the increase in either of the aforementioned areas. Physical capital refers to the amount of money that individuals have in investments and savings. New technologies mean technological advancements, like assembly lines or robots. Human capital represents increased education, as well as, workforce specialization. Measuring labor forces makes it possible for an economy to adequately understand these underlying trends. Labor productivity is another important measure of an economy's cyclical and short-term changes. High-level labor productivity is a fusion of labor hours and total output. Measuring labor productivity quarterly permits a company to calculate the change in its output in terms of the change in its hours of labor. Supposing the output continues increasing while labor hours remain static, then it could signal the technological advancement in the economy and should continue doing so. Conversely, if there's an increase labor hours in relation to flat output, then it may signal the economy's need to invest in education in order to increase its human capital.

Policies to Improve Labor Productivity

There are several ways that companies and governments can improve labor productivity. Investment in infrastructure: increasing the investment in infrastructure from private sectors and governments can help productivity while reducing the cost of engaging in business. Tax and welfare reforms: an implementation of these enhance work incentives and also increase incomes of individuals whose work is more productive. Quality of education and training: when workers are offered opportunity to upgrade their skills, and education, as well as, training are offered at affordable prices, they all help in raising a corporation's productivity. Business investment: this includes increasing the size of, and also constantly upgrading the capital stock of a company by pushing out machines which are aged, as well as, less efficient. Tax breaks: providing incentives for businesses to utilize clean, effective, and new technology to help enhance output. Deregulating product markets: deregulation is capable of removing entry barriers, increasing competition which can successively result in greater innovations and efficiency that yield higher productivity.

Related Topics

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• Experience Curve
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• How to Measure Productivity
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• Compound Growth Rate
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• Porter's Diamond
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• Human Capital
• Infrastructure
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• Resource Curse
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• Emerging Market Economy
• BRIC Countries 
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• Leading Economic Indicators
• KOF Economic Barometer
• CEO Confidence Survey
• NAB Business Confidence Index