Economy

The Baffling Trends of Lower Productivity and Higher Labor Costs

Jon C. Ogg

Published: June 7, 2016 1:10 pm

Last Updated: January 13, 2020 7:05 am

One key component of growth, which ends up driving gross domestic product (GDP), is the nonfarm productivity reading, followed by unit labor costs. The second look at first-quarter productivity was revised to −0.6%, slightly better than the preliminary −1.0% seen in a prior report.

The report also showed that unit labor costs were revised higher as well. First-quarter labor costs were up 4.5%, rather than the 4.1% gain previously reported. Labor costs reflected a 3.9% gain in hourly compensation and a 0.6% drop in productivity.

One driving force here is that output increased by 0.9%, while the average hours worked increased by 1.5%. The Bureau of Labor Statistics defined this as follows:

Labor productivity, or output per hour, is calculated by dividing an index of real output by an index of hours worked of all persons, including employees, proprietors, and unpaid family workers. Measures released today were based on more recent source data than were available for the preliminary report.

Additional data were shown as follows:

• Manufacturing sector labor productivity increased 1.3 percent in the first quarter of 2016, as output increased 0.6 percent and hours worked decreased 0.7 percent.
• Productivity decreased 0.6 percent in the durable goods manufacturing sector and increased 4.2 percent in the nondurable goods sector.
• Over the last four quarters, manufacturing productivity increased 1.3 percent, as output increased 0.6 percent and hours declined 0.7 percent.
• Unit labor costs in manufacturing increased 1.1 percent in the first quarter of 2016 and rose 3.6 percent from the same quarter a year ago.
• Hourly compensation increased 2.5 percent in the first quarter of 2016, and 5.0 percent since the same quarter a year ago–the largest four-quarter gain since a 5.8-percent increase from the first quarter of 2004 to the first quarter of 2005.

The report on unit labor costs includes all direct inputs for labor. Output from the manufacturing sector is measured relative to the prior year as well, and this of course might factor in companies and industries making slightly fewer goods based on lower demand.

This is never a market moving number, at least not on the revisions like we saw on Tuesday. That being said, this is a real issue of wage inflation. If labor costs keep rising, then we are likely to keep seeing bad payroll additions just like we saw last Friday.