First Quarter 2013 Productivity and Labor Cost

The revised numbers for productivity and unit labor costs in the first quarter of 2013 were lower than first tallied according to the Bureau of Labor Statistics. The growth in the nation’s nonfarm output per hour worked was closer to 0.5 percent instead of the first estimate of 0.7 percent. Unit labor costs got a huge revision. It was first thought that cost of labor associated with producing a “unit” was 0.5 percent higher on an annualized basis, but after surveying additional information, it appears the employment costs fell a staggering—and historic–4.3 percent.

Productivity is comprised of two components, output and hours worked. The nation’s output was an annualized 2.1 percent more than in the previous quarter. It only took 1.6 percent more hours worked, resulting in the 0.5 percent productivity gain. Year-over-year, the output increased by 2.4 percent and hours worked ticked up 1.5 percent.

The primary influence on the lower unit labor costs was the revised 3.8 percent decrease in hourly compensation. Combined with the 0.5 percent increase in productivity, the annualized unit labor cost fell 4.3 percent as noted above. The report does not explain the huge drop in compensation but it must reflect a decline in wages, benefits, or both. Is it possible that businesses are front running the future demands of the Affordable Care Act by making cuts to both?

This is another report that is likely to keep the Federal Reserve cautious as the year wears on. There has been recent scuttlebutt about the central bank tapering its accommodative policies as some within the various bank regions worry about the side effects of experimental monetary tactics. This productivity and unit labor costs report is likely to strengthen Ben Bernanke’s position for the approach. He may argue that the economy’s efficiency is falling since the difference in productivity gains between the 12-month look back and the annualized figure released in this quarterly report is negative, going to 0.5 percent from 0.9 percent. Also, with unit labor costs falling as quickly as it did, there is little evidence that wages will become the source of inflation anytime soon. (by C. Cox)