How to use the labor productivity calculator
Labor productivity is used to mean two different things. One is value added per employee, the output one person generates. The other is the ratio of value added to labor cost, which says how hard each payroll dollar works. This calculator reports both on separate lines and spells out in each label how the figure was derived, so the two never get mixed up.
Value added comes first. Using the subtraction method, it is revenue minus the value purchased from outside the business: materials, goods bought for resale and outsourced work. Labor cost and depreciation stay in, because they are created inside the business. If purchased inputs equal or exceed revenue, value added would be zero or negative and the ratios become meaningless, so the calculator shows a message instead.
Labor share of value added is the slice of that value that goes out as pay. A high share leaves little headroom for raises, a low share leaves more. Add total hours worked and you also get value added per hour, which is the number to watch when evaluating shorter weeks or shift changes. Tracking the same definition year over year tells you far more than any single reading.
Frequently asked questions
They answer different questions. Value added per employee shows how much output one person generates. The labor productivity ratio shows how much value added each dollar of payroll produces. Use the first for staffing decisions and the second when judging room for raises.
This calculator uses the subtraction method: revenue minus the value bought from outside, such as materials, goods for resale and outsourced work. Labor cost and depreciation are not subtracted, because removing labor cost would make the labor share figure impossible to compute.