Third Quarter Productivity and Unit Labor Costs

Nonfarm businesses increased their productivity in the third quarter by 1.9 percent according to the Bureau of Labor Statistics. This measure of efficiency is comprised of two components, output and hours worked. Output increased by 3.7 percent, while it only took 1.7 percent more hours to generate the added production. Year-over-year, productivity has stagnated; this is partially due to second quarter productivity being revised lower to 1.8 percent from 2.3 percent. In the last twelve months, output has increased by 1.8 percent, as has the number of hours worked in the economy.

Hourly compensation was up an annualized 1.3 percent for employees of nonfarm businesses in the quarter. Year-over-year, it has increased by 1.9 percent, so the most recent tally is slower than the average of the past three quarters. One standout on a quarterly and year-over-year basis is the nondurable manufacturing category; here, pay increased 3.3 percent on an annualized basis for the quarter and 2.8 percent over the last four quarters.

Combining the output per hour and compensation per hour yields the unit labor cost. The labor cost per unit of output declined by 0.6 percent in the third quarter as hourly output improved faster than hourly compensation. In the last year, the unit labor cost has grown by 1.9 percent.

Increased productivity allows the economy to grow without stoking the embers of inflation. If employees are not being used efficaciously, the result may be a shortage of supply which would likely drive up costs. In theory, the added productivity by firms should lead to better income statements causing increased wealth to owners of firms, and it may also lead to capital investment (equipment), both of which should help the virtuous portion of the business cycle. With any luck, the year-over-year productivity stagnation in the third quarter will prove to be an anomaly. (by C. Cox)