Labour productivity is output per worker, found by dividing total output by the number of workers. A productivity change is a change in that ratio, not in the total.
It matters in labour and wages because the value of what a worker produces is part of what an employer will pay, as you saw on the demand side in distinguishing demand from supply.
How do you interpret a productivity change?
- Calculate output per worker before and after.
- Find the percentage change: (new − old) ÷ old × 100, with the old figure as the base.
- Compare with the change in workers, so you do not mistake higher total output for higher productivity.
- Link to cost: labour cost per unit = wage per worker ÷ output per worker.
- State the limit: productivity can allow higher pay, but does not decide it alone.
Worked example
The fictional firm Sinar Tekstil makes shirts in a weekly cycle. Before it buys new machines, 20 workers make 400 shirts. After the machines arrive, the same 20 workers make 560 shirts.
Step 1, productivity before: 400 ÷ 20 = 20 shirts per worker.
Step 2, productivity after: 560 ÷ 20 = 28 shirts per worker.
Step 3, percentage change: (28 − 20) ÷ 20 × 100 = 40%. Total output also rose by 40% (160 ÷ 400), because the number of workers did not change.
Step 4, labour cost per unit: the weekly wage per worker was RM 600 before, so cost per shirt was 600 ÷ 20 = RM 30. After the machines the firm pays RM 700, so cost per shirt is 700 ÷ 28 = RM 25.
Step 5, interpret: the wage rose by 100 ÷ 600 = 16.7%, which is less than the 40% productivity rise. So labour cost per shirt fell from RM 30 to RM 25, a fall of 5 ÷ 30 = 16.7%. The firm could afford a higher wage and still cut its cost per shirt.
The mistake to watch for
Mistaken answer: “Sinar Tekstil made 800 shirts after hiring 40 workers, so productivity doubled.”
Total output doubled, but so did the number of workers, so output per worker is 800 ÷ 40 = 20, equal to the original 20. Productivity did not change. The correction is to divide by workers first, every time.
Check yourself
1. A bakery has 15 workers making 300 loaves. Later 18 workers make 396 loaves. What is the percentage change in productivity?
Show answer
Before: 300 ÷ 15 = 20. After: 396 ÷ 18 = 22. Change: (22 − 20) ÷ 20 × 100 = 10%.
2. In a workshop, output per worker rises from 20 to 22 units a week and the weekly wage rises from RM 400 to RM 440. What happens to labour cost per unit?
Show answer
Before: 400 ÷ 20 = RM 20. After: 440 ÷ 22 = RM 20. Both the wage and productivity rose by 10%, so labour cost per unit stays at RM 20.
3. A plant raises output from 600 to 900 units and its workers from 30 to 50. Has productivity risen?
Show answer
Before: 600 ÷ 30 = 20. After: 900 ÷ 50 = 18. Productivity fell by 10% (2 ÷ 20), even though total output rose.
Where this leads next
Productivity gives employers a reason to pay more, but wages are also negotiated. The next lesson, describing collective bargaining neutrally, covers that. You can test the percentage steps with the percentage-base explorer and practise ratio statements in the ratios tool.
When a calculation is right but the explanation loses marks, a teacher can read your sentences with you. Our online one-to-one Economics tuition is organised around that kind of feedback, and the practice set gives you material to bring.