Fourth Quarter Productivity and Unit Labor Costs

Productivity and unit labor costs moved in the wrong direction in the final quarter of 2012 according to the Bureau of Labor Statistics.  The output per hour of labor (productivity) fell 2.0 percent after growing by a revised 3.2 percent in the third quarter (originally tallied as 2.9 percent).  The labor costs for each unit of output jumped 4.5 percent after sliding a downwardly revised -2.3 percent which was initially thought to be -1.9 percent.

Productivity is comprised of two parts, output and labor.  Output managed to grow by 0.1 for the nonfarm business sector.  Unfortunately, the increased production was more than offset by an increase in the number of labor hours required for the output.  Hours worked grew by 2.2 percent, and the additional hours only managed to increase output by the aforementioned 0.1 percent.   Complicating the situation for companies was the 2.4 percent uptick in hourly compensation.  To summarize, companies produced a little more in the quarter, but they needed substantially more hours to increase the output, and workers were paid more for each hour they worked.  When combined, the unit labor cost grew 4.5 percent.

The fourth quarter was not kind to companies from an efficiency perspective.  There was a large price to pay for the small gain in output.  If a negative trend in this indicator begins, the additional costs are likely to have consequences on the economy.  Businesses may choose to raise prices in order to compensate for their added costs.  Alternatively, companies might choose to accept tighter profit margins.  Of course, companies could seek ways to reduce staffing if the output does not improve in the coming quarters.  From Atlas’ perspective, this was not a productive report, and we anxiously wait for the next iteration hoping for a better outcome.  (by C. Cox)