Labor efficiency is a measure of how efficiently a given workforce accomplishes a task, when compared to the standard in that industry or setting. There are several different ways to measure labor efficiency, depending on the type of products and services being produced, and the end goal. Companies periodically assess efficiency along with other characteristics to identify weak points in the labor force and determine where they have room for improvement, with the goal of improving the overall quality of goods and services while keeping costs down.
One way to look at labor efficiency is to compare the number of hours actually required to produce a given product or service with those usually required. If the workforce is producing products and services at below the usual rate, it is operating with high efficiency, cutting time off production. This can translate into significant savings, as the company will spend less money on wages and overhead because it is turning out finished services and products at a more efficient rate.
Companies may also look at how many units of products or services are produced within a given time. This calculation for labor efficiency can help a company determine what the standard is. A company making a new model of car, for example, would see how many labor hours it requires to make one, and will track changes in labor efficiency over time. The goal is to reduce the number of hours through familiarity with the process, introduction of new parts and techniques to streamline car manufacturing, and similar measures.
As labor efficiency goes up, costs go down. It may also be possible to ramp up production, because more labor hours are available for producing goods and services. This can be critical in periods of increased demand, where the company needs more laborers available to make more goods or offer more services. More efficiency can also translate into wider opportunities for research and development, as the company has workers available to put on these tasks instead of having to focus on meeting the needs of the production line.
Companies usually measure labor efficiency for internal purposes and may not discuss it in external reports and filings unless it becomes directly relevant to an issue of interest in such documents. In some cases, a third party consultant performs this assessment as part of an overall evaluation of a business. Consultants can help companies improve overall efficiency and quality by bringing a fresh perspective to the workplace.