August 16, 2018

About That Second-Quarter Productivity Surge and the Accompanying Decline in Unit Labor Costs: Don’t Worry, It’s All Good

Filed under: Economy,Taxes & Government — Tom @ 10:24 pm

On Wednesday, the government reported the first good news on productivity in a long time:

Nonfarm business sector labor productivity increased 2.9 percent during the second quarter of 2018, the U.S. Bureau of Labor Statistics reported today, as output increased 4.8 percent and hours worked increased 1.9 percent. (All quarterly percent changes in this release are seasonally adjusted annual rates.) From the second quarter of 2017 to the second quarter of 2018, productivity increased 1.3 percent, reflecting a 3.5-percent increase in output and a 2.2-percent increase in hours worked.

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.

Unit labor costs in the nonfarm business sector decreased 0.9 percent in the second quarter of 2018, reflecting a 2.0-percent increase in hourly compensation and a 2.9-percent increase in productivity. Unit labor costs increased 1.9 percent over the last four quarters.

Some observers are concerned about the decline in unit labor costs, with little support:

  • First, that’s what happens when the “units” go up by so much (an annualized 4.8 percent), which *could* foreshadow an upward second-quarter GDP revision from the 4.1 reported in late July.
  • Second, the 2.0 increase in hourly compensation is an aggregate figure, meaning that compensation for everyone working went up by that amount.
  • Finally, you have to look at who entered the workforce during the second quarter.

Concerning the third item, it’s worth noting that newer workforce entrants, especially those who have been on the sidelines and are finally returning, are likely getting entry-level pay which is far below the national average hourly rate. So in addition to the output increase just cited, people who aren’t as expensive to pay are keeping the overall cost of labor down.

This lesson is important, because the wailing and gnashing of teeth over average hourly and weekly pay is somewhat misplaced. When lower-paid workers get added to the mix (and I should add, are on the books and not off the books, as would be the case will employed illegal immigrants), these metrics won’t increase as much as one might hope.

But overall personal income will still increase because more people are employed — and it has, advancing in real terms by 1.1 percent in the past five months. That translates to about 2.7 percent annually — again, in real terms, which really means about 5 percent before inflation.

So, thanks to the economy finally getting within striking distance of genuine full employment and getting relatively marginal workers into jobs, it’s reasonable to believe that existing, non-entry-level workers are seeing better pay increases than seen in the monthly Employment Situation Report, and that the obsession with flat wages is a bit misplaced.

Perhaps this partially validates what Mark Zandi, the ADP Employment Report’s director, has been saying for quite a while, namely that existing workers, based on ADP data, are seeing pay increases in the 4 percent to 5 percent range.




1 Comment

  1. More coming to the Labor Force in 3 months:

    More than 67,000 able-bodied Michiganders must now work to receive food assistance

    Comment by dscott — August 17, 2018 @ 4:27 pm

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