Rising Labor Costs Overshadow Negative Worker Productivity

Jon C. Ogg

With 2016 being an election year, everyone keeps getting reminded that the middle class and working class are not getting their fair slice of the economic pie. There might not have been adequate pay raises for years, but the latest productivity and unit labor costs revision is showing that workers are producing more but at a rate that is far less than the costs associated with the report.

Nonfarm productivity in the second quarter was put at −0.6%, compared with a prior reading of −0.5%. This met the Bloomberg consensus estimate.

The big gain was in unit labor costs. The prior report of 2.0% was expected to be revised up to 2.1%, but this more than doubled to a gain of 4.3%. The reason for this sharp gain was in compensation, rising to 3.7% from 1.5%.

So what about output versus the cost and effort? It turns out that the output component rose by 1.1%, but it took a 1.7% gain in hours worked to make that output gain.

The rest of the view on productivity versus labor costs may break down to where people stand in their status as an employer versus employees, or as an investor versus a political view. Employers might argue that output and productivity need to rise versus costs. Labor might argue that gains should be good enough.

Higher wages benefit the consumer and should help consumer spending. The other side of the coin is that higher wages without productivity gains matching the steps are negative for the economy and point to a stretched workforce.

What also should matter now is that productivity has fallen for three consecutive quarters. That is far from the norm, and with increases in wages and low inflation, the pressure on productivity seems more likely to remain a key issue.

One side of the issue from labor may be that there has been a lack of investment in new equipment. Still, with such a slack in capacity utilization, it seems unlikely that businesses will want to invest in new plants and equipment when they have so much unused capacity in the equipment they already have.

The beat goes on.