Organization Salary Determinations

Measuring Productivity

Two measurements of productivity are used, but for different purposes. You can use:

• output per hours worked, called labor productivity
• output per unit of capital and labor, called total factor productivity

Labor productivity

Output per hours worked answers questions concerning the effectiveness of human labor under the varying circumstances of:

• labor quality
• sale of output
• amount of equipment/technology
• methods of production

Output per hours worked is the appropriate measure to employ in salary questions.

It reflects the combined effect of changes in the:

• efficiency with which labor and capital are used
• amount of tangible capital employed with each hour of labor
• average quality of labor

These three factors have been found to best explain the long-term trend in the general level of real salaries.

Labor productivity measures the contributions of labor and all the other input factors. Estimating the contribution of various factors makes it possible to measure labor productivity at various levels for use as salary standards. A principles based framework should be used to ensure consistent and systematic application of this measure.

Total factor productivity

Output per unit of capital and labor measures the efficiency of labor and capital combined.

This second measure gauges whether efficiency in the conversion of labor and capital into output is rising or falling as a result of changes in:

• size
• technology
• management skills
• character of economic organization

Output per unit of capital and labor is more complex and more limited in use when it comes to salary determination.