Should Negative Labor Productivity Become a Political Hot Button?

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As 2016 is an election year, the public is being force-fed endless rhetoric and data about what taxes are fair, how hourly wages need to rise, the wealth gap, a lack of capital spending and Wall Street, all making America in need of yet more change. What is interesting is that no politician really will try to tackle the issue of a decline in overall labor productivity.

This decline in productivity is a serious issue, and there may be a reason you are unlikely hear the talking heads jump into it. After all, it might just mean that people need to be happy with what they have. Or what if a politician told unhappy Americans that they need to travel to lesser countries to see what the average living conditions are like there?

One thing that should be considered is that higher productivity actually competes with employment growth. If an employer can milk out an extra 2% or 3% output from the same size of a workforce each year, maybe they do not feel the need to grow their payrolls. And if you can increase productivity even more, maybe employers can trim costs by cutting their overhead. The inverse is what happens when productivity is in decline — and that is the case in 2016.

Nonfarm business sector labor productivity fell by 0.5% on an annualized basis in the second quarter of 2016, according to the preliminary report from the Bureau of Labor Statistics (BLS). Output actually rose by 1.2% and the hours worked increased by 1.8%.

From the second quarter of 2015 to the second quarter of 2016, productivity was down by 0.4%, the first four-quarter decline since a 0.6% drop in the second quarter of 2013. The culprit here is that nonfarm unit labor costs rose by 2.0% in the second quarter of 2016. Unit labor costs have risen by 2.1% over the past four quarters.

The BLS further said that manufacturing sector labor productivity was down by 0.2% in the second quarter of 2016 (output and hours worked decreased 0.8% and 0.7%, respectively). Output per hour rose 2.6% in the durable goods manufacturing sector, reflecting a 2.0% drop in hours worked and a 0.5% increase in output.

What economists and market watchers will want to consider here is that the first-quarter report also showed a 0.6% drop in nonfarm productivity. Bloomberg noted that productivity fell 0.5% in the quarter, for the third decline in a row, saying that this is the longest negative streak for productivity dating back to just after World War II.

A lack of business investment and capital spending continues to be an issue. This can continue to weaken productivity ahead. The inverse side of this argument is that even with Americans working longer hours, the overall production is not keeping up.

And to show just how bad this −0.5% in nonfarm productivity is in comparison to expectations, take a look at the big three news agencies with consensus estimates:

  • Bloomberg expected a gain of 0.5%.
  • Dow Jones (WSJ) expected a gain of 0.4%.
  • Thomson Reuters expected a gain of 0.4%.