Revised Fourth Quarter Productivity and Costs

There were only minor changes to the initial figures of fourth quarter 2012 productivity and costs according to the Bureau of Labor Statistics.  Productivity fell slightly less than the first count suggested, down an annualized 1.9 percent versus 2.0 percent in the first tally.  However, the unit labor costs (ULC) were more expensive than initially thought, up an annualized 4.6 percent versus 4.5 percent in the earlier estimation.  This is because in addition to the slowdown in productivity, hourly compensation increased 2.6 percent; wages only grew by an annualized 1.7 percent in the third quarter.

The year-over-year comparisons were not favorable for the economy either.  Productivity slowed from the third quarter’s annual pace of 1.6 percent to 0.5 percent in the final three months of last year.  In other words, companies are seeing a slowdown in the growth of output per hour of labor worked.  The fourth quarter’s annual unit labor costs also deteriorated, meaning that ULC grew faster than the prior year-on-year tally which ended in September 2012.  Looking back twelve months, it cost companies 2.1 percent more in wages for each unit of production versus an increase of just 0.1 percent in the third quarter.

This is one quarter of data and not a trend, but it will need to improve in the coming quarters or there may be negative consequences.  Companies will need to find a way to make their labor costs become more effective, and unless there is a technology to solve the issue, jobs may be sacrificed and workloads increased on those that survive the cutback.  Perhaps, companies will try to pass the inefficiency on to consumers in the form of price increases.   Management may have to make an attempt to explain to shareholders why their margins are being squeezed.   A rosier scenario would have workers becoming more efficient without prodding or layoffs as the newly hired become better acquainted with their new roles.     (by C. Cox)