Productivity Calculator

Two ratios, one question

Productivity is one of those words that gets used to mean roughly anything. Working harder. Working longer. Answering email faster. As a measurement it means something much narrower and much more useful: how much you got out, divided by how much went in.

This calculator wants three numbers and gives you back two ratios.

Neither number means much on its own. A hundred rupees an hour is excellent for some businesses and a disaster for others. They earn their keep by being compared, either against your own earlier periods or against similar businesses, and the rest of this page is mostly about doing that honestly.

Revenue is not the same thing as output

Now the part that matters most, and the reason it comes second rather than last.

This tool divides revenue by hours. The official statistical measures of labour productivity do not. They divide output by hours, and output is a narrower thing.

The US Bureau of Labor Statistics defines labour productivity as real, inflation adjusted output per labour hour, and for business sectors it uses a value added measure of output. Eurostat says much the same thing more bluntly: labour productivity is often defined as value added per employed person.

Value added is what your business created. Revenue minus everything you bought in from somebody else, so materials, components, purchased services, subcontracting.

Why the distinction bites: revenue per hour rewards buying more inputs. Start subcontracting a chunk of your work and your revenue holds up while your hours fall, so revenue per hour jumps and it looks like your team got better. Nothing about your team changed. You just moved work outside and are now measuring somebody else's labour as your own productivity.

How much difference does it make? On the worked example below, revenue per hour is $750 and value added per hour is $312.50. The same business, the same hours, and a figure that is 2.4 times larger depending on which one you use.

None of which makes revenue per hour useless. It is a fine operating metric, it is easy to get from figures you already have, and for a service business with few bought-in inputs the two numbers are close anyway. But be clear about which one you are quoting, and never compare your revenue-based figure against a published productivity statistic, because those are built on value added and you would be comparing two different things.

If you want the value added version, subtract your bought-in materials and services from revenue before you type it in. Same tool, better number.

A workshop, measured

Take a small operation. 20 employees, 3,200 hours worked in the quarter, $24,00,000 of revenue.

$24,00,000 divided by 3,200 hours is $750. Divided by 20 employees it is $1,20,000 each for the quarter.

Now suppose $14,00,000 of that revenue went straight back out on materials and bought-in services. Value added is $10,00,000, and value added per hour is $312.50.

Both figures are true. They answer different questions. $750 is what an hour of your team's time brings through the door. $312.50 is what an hour of your team's time actually creates. If you are pricing a job, you want the first. If you are asking whether your people are getting better at their work, you want the second.

A useful third number falls out of these for free. Divide the labour cost for the period by the hours and compare it against the value added per hour. If value added per hour is $312.50 and you are paying $200 an hour all in, the gap is what covers everything else. Rent, machines, management, and profit. When that gap closes, nothing else is wrong yet, but it will be.

Per hour and per head tell different stories

Two ratios rather than one, because they move independently and the gap between them is informative.

Per employee is affected by how much each person works. Hire part timers and it falls. Push everyone into long weeks and it rises, without anybody getting better at anything.

Per hour strips that out. It is the fairer measure of whether the work itself is being done more effectively, which is exactly why it is the one statistical agencies publish.

So read them together:

That last row is the one to watch for. Revenue holds up, output per head climbs, everyone is congratulated, and output per hour is quietly falling because the only thing that changed is that people are working later. It is a pattern that looks like success for two or three quarters and then stops.

Which is also why the hours figure needs to be honest. Contracted hours are not hours worked. If unpaid overtime is happening, and it usually is, using contracted hours overstates productivity by exactly the amount of work you are not counting. Our overtime calculator is the place to work out what those hours are actually worth.

Comparing one period against another

A single reading is nearly meaningless. The value is in the trend, and there is one thing that will corrupt a trend if you let it.

Inflation. Revenue is measured in money, and money changes. Raise your prices six percent, sell exactly the same quantity with exactly the same hours, and this calculator will show six percent higher productivity. Your team did not improve. Prices did.

This is precisely why the official measures use real, inflation adjusted output rather than nominal figures. The BLS is explicit that adjusting nominal output for price change is one of the genuinely hard parts of measuring productivity at all.

Two ways to handle it without much trouble.

Deflate the revenue. Before entering this year's figure, divide it by one plus the price increase since your base period. Our inflation calculator and real rate of return calculator both handle that step.

Or drop money entirely. If your business makes countable things, use units rather than revenue. Garments sewn, tickets closed, deliveries completed. Units per hour cannot be inflated, which makes it the cleanest productivity measure a small business can keep. The calculator does not mind what you put in the revenue box.

Three more things that will move the number without anybody working differently: a change in what you sell, a change in what you subcontract, and a change in how hours are recorded. Check all three before concluding anything from a jump.

What the number is not

Worth saying plainly, because this is a measure that gets pointed at people.

Labour productivity is named after labour but it is not a measure of how hard anyone is working. The BLS lists what actually drives it: technology, capital equipment, worker skills and experience, management practices, economies of scale, and the amount of non-labour inputs used. Most of that is decided well above the person doing the work.

An electrician with good tools and a well organised van will out-produce an equally skilled one without them, every time. That gap is a capital and management outcome, not an effort one.

Which makes this a diagnostic rather than a verdict. A falling number is a question, not an answer, and the question is usually about equipment, process, or how work is being allocated. If the conclusion you reach from a productivity figure is that people should try harder, the measurement has probably not been used properly.

It also cannot see quality, safety, whether the revenue was profitable, or whether the pace is sustainable. Something delivered in half the time and reworked twice looks excellent here.

Questions people ask

Which hours do I enter?

Hours actually worked across the period, everybody included, not contracted hours and not a headcount multiplied by a standard week. Undercounting hours inflates the result.

Should I enter revenue or profit?

Revenue is what the tool is labelled for. Value added, meaning revenue minus bought-in goods and services, gives you the figure that matches published productivity statistics. Profit is a different measure and does not belong here.

What is a good productivity figure?

There is no universal answer. It varies enormously by industry and by how capital intensive the work is. Compare against your own earlier periods first, and against similar businesses second.

Can I use units instead of money?

Yes, and for tracking a trend it is often better, since units cannot be moved by a price change. Enter your unit count in the revenue box and read the result as units per hour.

What period should I measure?

Anything, as long as revenue, hours and headcount all cover the same one. Monthly is usually too noisy for a small team. Quarterly tends to show a trend without drowning in it.

How do part timers affect it?

They pull the per employee figure down without affecting the per hour figure, which is one of the reasons per hour is the more reliable of the two. Count them as one employee each and count their actual hours.

References

A note on the sources. The definition this page holds the calculator up against, that labour productivity is real output per hour worked and that business sector output is measured on a value added basis, is the US Bureau of Labor Statistics' own, and it is the reason the page distinguishes revenue from output rather than treating them as interchangeable. Eurostat's glossary states the value added definition in the same terms, which is useful confirmation that this is a settled convention rather than one agency's preference. The list of what actually drives productivity growth, and the acknowledgement that adjusting for price change is one of the hard parts of measuring it, are also from BLS.

1. U.S. Bureau of Labor Statistics, Handbook of Methods: Productivity Concepts, on labour productivity as a ratio of output to hours worked and on the drivers of productivity change. https://www.bls.gov/opub/hom/msp/concepts.htm
2. U.S. Bureau of Labor Statistics, Productivity: Overview, on the use of value added output for business sectors and sectoral output for industry measures. https://www.bls.gov/productivity/overview.htm
3. U.S. Bureau of Labor Statistics, Productivity: Questions and Answers, on the distinction between labour productivity and total factor productivity. https://www.bls.gov/productivity/questions-and-answers.htm
4. Eurostat, Glossary: Labour productivity, on labour productivity defined as value added per employed person within national accounts and structural business statistics. https://ec.europa.eu/eurostat/statistics-explained/index.php/Glossary:Labour_productivity