Labor productivity signifies how efficiently goods and services are produced in a country and is the single most determinant of a nation’s per capita income over a long term. To have high labor productivity (which in turn leads to higher standard of living) a country needs to be innovative enough to tackle the changing global economic scenario.
Labor productivity is dependent on three major factors viz. investment and saving in physical capital, new technology and human capital.
Apart from these factors, cultural belief-value, international influences, managerial-organizational and wider economic and political-legal environments along with levels of flexibility in internal labor markets and the organization of work activities also play an important role in determining the labor productivity. Improving productivity is not about working longer or harder; it’s about working smarter by finding more efficient and effective ways to produce goods and services so that more can be produced with the same amount of effort.
To illustrate how labor productivity is calculated let us assume that a country has a GDP of $5 trillion with 100 billion labor hours, the labor productivity works out to $50 per labor hour. A comparison of this value with that of similar economies will depict the country’s performance in terms of productivity.