Efficiency and labour productivity

27.1 Are efficiency and productivity the same thing?

No. Productivity is output per worker per time period. That ignores some other key factors of efficiency, notably waste. Productivity can be high but overall efficiency is no better than average. Overall, labour productivity is regarded by business as one of the most important tests of management efficiency. Therefore most of the chapter focuses on labour productivity.

27.2 Productivity: what is it?

Labour productivity measures the amount a worker produces over a given time. For example, an employee might make ten pairs of jeans in an hour. Measuring productivity is relatively easy in manufacturing, where the number of goods can be counted. In the service sector is not always possible to be sure what to measure. Productivity in services can be measured in some cases: the number of patients seen, and the sales per employee. 

It is important to distinguish between productivity and total output. By hiring more employees a firm may increase the total output, but this does not mean that the output per emoloyee has gone up. Similarly it is possible to have lower productivity because of a fall in the number of employees. A rise in productivity would lower the labour cost per unit.

27.3 The importance of produtivity

The output per employee is a very importanant measure of a firm's performance. It has a direct impact on the cost of producing a unit. If productivity increases then, assuming wages are unchanged, the labour cost per unit will fall. With lower labour costs this firm i slokely to be in a better competitive position. 

By increasing productivity a firm can improve its competitiveness. It can either sell its products at a lower price or keep the price as it is and enjoy a higher profit margin. This is why firms continually moniter their productivity relative to their competitors and, where possible, try to increase it. However, they need to make sure that quality does not suffer in the rush to produce more. It may be necessary to set both productivity and quality targets.

27.4 How to increase labour productivity

Increase investment in modern equipment:

  • By investing in modern, sophisticted machines and better production processes, it shouldn't be hard to improve output per worker. That, in turn, would improve individual companies' competitiveness and help to boost the country's economic growth. 

Improve the ability level of those at work:

  • To increase productivity a firm may need to…


Thomas Clowes-Pritchard


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