Labour Productivity
Business Management: IB Diploma, topic 2.1.4
Labour Productivity
Labour productivity is a measure of the units produced by an employee in a given period of time. HR managers use this as a measure of an employee’s performance during appraisal reviews to inform decisions about employee pay and any possible training requirements.
Calculating labour productivity
- Labour productivity is expressed as a number of units. It is calculated using the following formula:
- Labour productivity = Total output ÷ Total number of employees
Example of calculating labour productivity
- If a business has 1,000 employees, and during a one month period, produces 250,000 bottles of orange juice, the labour productivity can be calculated by dividing 250,000 units by 1,000 employees to give 250 units per employee.
- A Human Resources manager could compare a labour productivity calculation with previous years to assess how productive the current workforce is. HR managers may reward employees if productivity is increasing, though may plan training for employees if productivity is decreasing.
Employee Costs as a Percentage of Turnover
For many businesses, employees are the biggest cost of the business. In all businesses, and especially in labour-intensive businesses, HR managers must understand how the level of spending on employees compares to the overall size of the business.
Calculating employee costs
- Calculating employee costs as a percentage of turnover allows HR managers to assess, as a proportion of total revenue, or turnover, the amount that is spent on staffing costs.
- Employee costs as a percentage of turnover are expressed as a percentage and are calculated using the following formula:
- Employee costs as a percentage of turnover = (Total employee costs ÷ Total revenue) × 100
Example of calculating employee costs
- If a newsagent had staffing costs of £105,000 in 2017, and had total revenue of £1,100,000, employee costs as a percentage of turnover could be calculated by dividing £105,000 by £1,100,000, to get 0.095, multiplied by 100 gives 9.55%. This means that the business spends 9.55% of its total revenue on employee costs.
Employee costs as a percentage of turnover
- A Human Resources manager could compare their employee costs as a percentage of turnover with data from previous years, with data from competitors, if it is available, or with data from the industry.
- If employee costs as a percentage of turnover are higher than they have been in previous years, a Human Resources manager may decide to try and reduce their total employee costs.
Lower employee costs as a percentage of turnover
- Some businesses, for example, Aldi, have much lower employee costs as a percentage of turnover, because they place emphasis on cutting costs by operating minimum numbers of checkouts and limited numbers of shop floor staff, compared with supermarkets such as Sainsbury’s and Marks and Spencer.
Test yourself on Labour Productivity
A business has 75 employees. They produce 10,000 bottles of beer a week. What is the labour productivity?
What will HR managers consider if productivity is decreasing?
A business has 3,000 employees. They produce 600,000 pencil cases. What is the labour productivity?
For many businesses, what is the biggest cost of the business?
An independent hotel has staffing costs of £400,000 a year. Its total revenue was £2 million. What are the employee costs as a percentage of turnover?