What is ‘Labor Productivity’ Anyway?

Continuing our 1^st Tuesday Blog series, we once again try to explain another well-publicized economic metric-Labor Productivity (LP).  The concept is often misunderstood and ‘re-purposed’ by diverse groups to become arguments for their side in some larger issue.  It is, in fact, a measure that relates to everyone the same and is where value is created in our economy. Simply put, Labor Productivity is the amount of output per labor hour.  Although there are three factors that compose the LP numbers nationally, we’re limiting our look to just two: Labor and Capital.  Think of capital as investments in making everyone’s life easier.

For example, the bushes around the backyard need trimming.  You have a hand trimmer shaped like an ‘X’ and you’ll need four hours to trim them.  You do that once and you see an ad for a power trimmer.  Hmmmm.  After investing $180 in the power trimmer, the next time it only takes you an hour and a half to finish!  That $180 investment provided you with two and a half hours more time to yourself on that trim day.  Better yet, every time you trim those bushes, the power trimmer dutifully gives you back two and a half hours every trim day from there forward!  Obviously, this is the most micro view of LP, but it makes the point well.

Expanding the concept of LP, let’s go up a notch in the food chain- a small company.  The further one goes from the simple example above toward more of a macro scale, you would be into the US Bureau of Labor Statistics (BLS) publications and analysis for the US economy.  Getting the basic concept is probably a more productive use of time for most people.  The small jump to a small business will also demonstrate how fast this concept gets complicated.

Productivity Scenario

Above you’ll find a chart for a company called Widgetelly Inc.  It’s a small shop just starting out making widgets and selling them into the market.  They have four workers and a lack of proper tools to get the most out of the job.  The seven scenarios reflect the decisions Widgetelly faces as it grows and the implications of those decisions on the company’s productivity.  The basic choice between a new machine or a new worker is basic to running a business of any size.  Look through the scenarios and follow the results with respect to the company’s productivity numbers and the monetary impact.

The goal of growing LP is that at every level, it stays the same and simple: Making everyone’s life easier!