What it is:
Labor productivity measures the hourly productive output for a country's economy during a period of time.
How it works (Example):
The formula for labor productivity is:
Labor Productivity = Total Output / Total Productive Hours
Gross domestic product (GDP) is generally used as the measure of total output.
For example, suppose a country's total output for 2010 was $5 trillion. All members of its labor force worked a total of 100 billion productive hours for the year. Labor productivity is found by dividing $5 trillion by 100 billion productive hours:
= $5 trillion / 100 billion hours
= $50 per hour
The country's labor productivity for 2010 was $50 per hour.
Why it Matters:
Economic analysts and policymakers compare a country's labor productivity from period to period as a measure of output efficiency. An upward trend in labor productivity suggests a rising cost of living.
Labor productivity is also compared among different countries to determine which are more or less productive than others.