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What is Productivity? > Unit Labor Cost

What is unit labor cost?

Unit Labor Cost (ULC) is how much a business pays its workers to produce one unit of output.

Businesses pay workers compensation that can include both wages and benefits, such as health insurance and retirement contributions.

Unit Labor Cost is calculated as the ratio of labor compensation to output.
Unit Labor Cost is also equal to the ratio of compensation per hour worked over output per hour worked.

Expressing unit labor cost in this way shows that increases in hourly compensation tend to increase unit labor costs, and increases in output per hour worked—labor productivity—tend to reduce them.

Thus, labor productivity increases can offset the effect of wage increases on unit labor cost.