Labour productivity: determinants and significance

Overview

Labour productivity, difference between production and productivity and rising productivity allow wages to rise without adding to inflation.

What you need to know

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Questions from this subtopic

Each one with the model answer underneath.

1. 1

   What is labour productivity, and what are the two ways it is usually measured?

   Model answer

   Labour productivity is the output produced per unit of labour input over a given period. It is normally measured either as output per worker, which is total output divided by the number of workers employed, or as output per hour worked, which is total output divided by the total hours worked. Output per hour is the better measure for international comparison, because countries differ greatly in average hours.

2. 2

   A factory produces 24,000 units in a year using 40 workers. Calculate labour productivity per worker.

   Model answer

   Labour productivity per worker equals total output divided by the number of workers, so 24,000 divided by 40 = 600 units per worker per year. Expressed per week over a 48-week working year this is 600 divided by 48 = 12.5 units per worker per week. The measure tells us how much output each worker accounts for, not how hard any individual is working, because it also reflects the machinery and methods available to them.

3. 3

   In a year a workshop produces 9,000 units using a total of 7,500 hours of labour. Calculate output per hour and explain why this measure is preferred for comparing countries.

   Model answer

   Output per hour is 9,000 ÷ 7,500 = 1.2 units per hour. It is preferred for international comparison because output per worker is distorted by differences in hours worked: a country whose employees work long hours can look highly productive per worker while being less productive for each hour at work. Output per hour strips that out and compares the efficiency of the work itself.

4. 4

   A firm produced 24,000 units with 40 workers last year and 27,600 units with 46 workers this year. Calculate the percentage change in output and the change in labour productivity, and comment.

   Model answer

   Output rose from 24,000 to 27,600 units, an increase of 3,600 units, which is 3,600 divided by 24,000 = 0.15, or 15%. Labour productivity was 24,000 divided by 40 = 600 units per worker last year and 27,600 divided by 46 = 600 units per worker this year, so it is unchanged. The firm has grown purely by hiring more people rather than by getting more from each one, which shows that rising production and rising productivity are different things.

5. 5

   What is the difference between production and productivity?

   Model answer

   Production is the total quantity of output produced, a measure of volume, while productivity is output per unit of input, a measure of efficiency. Production can rise simply because more workers or more machines have been employed, with each unit of input producing exactly as much as before. Only a rise in productivity means the same resources are yielding more, which is why productivity rather than production determines living standards in the long run.

6. 6

   A worker is paid 30,000 pounds a year and produces 1,500 units. After new equipment and training, output rises to 2,000 units and the wage rises to 33,000 pounds. Calculate the unit labour cost before and after, and explain the significance.

   Model answer

   Unit labour cost is the wage bill divided by output, so before the change it is 30,000 divided by 1,500 = 20 pounds per unit, and after it is 33,000 divided by 2,000 = 16.50 pounds per unit. The cost per unit has fallen by 3.50 pounds, a reduction of 3.50 divided by 20 = 0.175, or 17.5%. The worker is better paid and the product is cheaper to make at the same time, which is only possible because productivity rose faster than the wage.

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