US worker productivity barely increased in the third quarter after steep declines in the first half of the year, though enough to slow the pace of labor cost growth.
Productivity, or nonfarm business employee output per hour, increased at a 0.3% annual rate in the third quarter, according to Labor Department figures Thursday. That compared to a 4.1% decline in the second quarter and the 0.5% projected advance in a Bloomberg survey of economists.
Unit labor costs, or the amount a business pays to produce one unit of output, climbed at a 3.5% rate after surging 8.9% in the second quarter. The deceleration reflected the slight improvement in productivity and an easing in hourly compensation growth. Compared to the same quarter last year however, labor costs were up a robust 6.1%.
Firms often adopt new technologies or invest in equipment to make their workers more productive and help offset the inflationary impact of wage increases. Though the productivity figures can be extremely volatile, and have been especially so in the pandemic and subsequent recovery, the data do suggest some slowing. Compared to a year ago, productivity was down 1.4%.
Productivity challenges may partly reflect the significant amount of churn in the labor market over the past year, with employers paying up to fill open positions with new talent. But more generally, a persistent softening in productivity also implies tighter monetary policy.
To be sure, it will take some time to establish the underlying trend in productivity in the wake of the pandemic, but a permanent downshift would be more concerning because of the repercussions for the economy in the long run.
The unemployment rate has fallen back to a historic low of 3.5% and job openings outnumber unemployed workers by nearly two to one. The competition for workers has driven rapid wage gains across industries and income groups.
Hourly Compensation
Thursday’s report showed hourly compensation rose 3.8% in the period from the second quarter. From a year earlier, compensation was up 4.7%. Adjusted for inflation, however, earnings declined for a third-straight quarter.
The figures are comparable to other recent data. The employment cost index, a broad gauge of wages and benefits, was up 5% in the third quarter from a year earlier. That’s roughly double the average annual pace seen over the five years preceding the pandemic.
Nonfarm business output as measured by this report, which is about 75% of gross domestic product, rose at a 2.8% pace in the third quarter, according to the report. GDP increased in the third quarter after consecutive quarterly declines in the first half of the year. While the biggest contributor to growth was the volatile net exports category, resilient consumers and businesses also helped power the economy ahead.
Hours worked, the other input in productivity calculations, increased 2.4%.
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