Revised Third Quarter Productivity and Unit Labor Costs

The nation’s third quarter productivity figure was higher than initially tallied according to the Bureau of Labor Statistics.  This is in line with the similar revision to the quarter’s GDP figure.  The 2.9 percent increase was revised up from the first reading of 1.9 percent.  Unit labor costs fell 1.9 percent which is much better than the 0.1 percent drop initially reported.

The gain in productivity is a result of output growing faster than the increase in hours worked.  Output improved by a seasonally adjusted annualized rate of 4.2 percent.  This added production only required hours worked to go up by 1.3 percent.  Year-over-year, output and hours worked have increased by 3.5 percent and 1.8 percent respectively; this represents a productivity improvement of 1.7 percent over the same period.

The added productivity helped reduced the per-unit costs of output.  The improved production per hour grew faster than the increase in the average hourly rate of compensation.  Including the decrease of 1.9 percent in the third quarter, unit labor costs are only up 0.1 percent in the last year.

Workers are the greatest expense to production.  With that in mind, the year-over-year increase in unit labor cost is signaling that inflation will not rise substantially as a result of higher employee expenditures; the subdued growth in unit labor costs allows companies to remain profitable without needing to pass on large price increases to consumers in order to maintain healthy profit margins.  This is important because the central bank wants to continue being accommodative with its monetary policy as long as there is not extraordinary inflation.     (by C. Cox)