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Productivity Decreases the Most Since 1960 but Labor Costs Surge 9.6%, What's Going On?

Productivity is down and costs are up. There are are least 6 contributing factors.
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Labor Productivity Q3 2021-11

Labor Productivity and Costs

The BLS report on Productivity and Costs shows labor costs are soaring while quarterly productivity is at a 60-year low. 

Labor productivity, or output per hour, is calculated by dividing an index of real output by an index of hours worked by all persons, including employees, proprietors, and unpaid family workers. In the third quarter of 2021, both output and hours worked increased for the fifth consecutive quarter following historic declines in those measures in the second quarter of 2020.  

Labor Productivity Lowlights

  •  Nonfarm business sector labor productivity decreased 5.2 percent in the third quarter of 2021 as output increased 1.8 percent and hours worked increased 7.4 percent. 
  • This is the largest decline in quarterly productivity since the second quarter of 1960, when the measure decreased 6.1 percent. 
  • From the third quarter of 2020 to the third quarter of 2021, nonfarm business sector labor productivity decreased 0.6 percent. 
  • The four-quarter rate is the largest decline since the fourth quarter of 1993, when the measure also declined 0.6 percent. 

Unit Labor Costs 

  •  Unit labor costs in the nonfarm business sector increased at an annual rate of 9.6 percent in the third quarter of 2021, reflecting a 3.9-percent increase in hourly compensation and a 5.2-percent decrease in productivity. 
  • Unit labor costs increased 6.3 percent over the last four quarters. 
  • The BLS calculates unit labor costs as the ratio of hourly compensation to labor productivity. 

Manufacturing Productivity

  •  Manufacturing sector labor productivity decreased 1.8 percent in the third quarter of 2021, as output increased 5.1 percent and hours worked increased 7.0 percent. 
  • In the durable manufacturing sector, productivity increased 0.7 percent, with a 9.7-percent increase in output and an 8.9-percent increase in hours worked.
  • Nondurable manufacturing sector productivity decreased 3.6 percent, as 0.3-percent growth in output was outpaced by 4.0-percent growth in hours worked.
  • Total manufacturing sector productivity increased 2.2 percent from the same quarter a year ago.  
  • Manufacturing sector output is now 1.0 percent above its level in the fourth quarter of 2019, the last quarter not affected by the COVID-19 pandemic. 
  • Hours worked in manufacturing remain 3.2 percent below the fourth-quarter 2019 level.

Manufacturing Labor Costs 

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  •  Unit labor costs in the total manufacturing sector increased 4.6 percent in the third quarter of 2021, reflecting a 2.7-percent increase in hourly compensation and a 1.8-percent decrease in productivity. 
  • Manufacturing unit labor costs increased 3.7 percent from the same quarter a year ago.  

Negative Revisions 

Productivity and 2021-Q3 Econoday

The numbers today are revisions to preliminary numbers for the third quarter that the BLS released last month.

Econoday expected positive revisions.

What's Going On?

  1. In the scramble to find workers, employers are accepting nearly everyone who applies and at increasing pay levels. New employees are not well-trained and are not as productive, yet they cost more.
  2. Three rounds of stimulus paid millions of workers more being unemployed than employed. They have not all returned to work and some won't. This puts upward pressure on wages.
  3. Child tax credits come into play. Biden wants to extend them. Pay people enough not to work and some won't. 
  4. Job jumping compounds the problem. Even skilled labor is not as productive initially in a new environment.
  5. Shortages impact output. For example, if you need a chip, you can't finish a car. 
  6. Boomer retirements. Skilled boomers are retiring en masse. They are replaced by less skilled labor.

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