An economy can grow when the number of workers increases (i.e. employment increases) or when each worker produces more. Labour productivity measures the latter effect.

Changes in labour productivity shows whether output is increasing or decreasing per worker and is often used in wage settlements to compensate workers for productivity improvements. Growth in labour productivity is the key to higher living standards as a country can sustain real wage increases without losing competitiveness, only if labour productivity grows.

Labour productivity relates output to the number of workers employed. It does not measure the specific contribution of labour alone. Rather, it reflects the joint effects of many factors, including new technology, capital investment, health and skills of workers and the use of more efficient management and production practices.