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The U.S. Department of Labor has released data indicating that nonfarm labor productivity rose by 2.9% in the second quarter of 2018. This was the strongest productivity gain in over three years.

Despite higher compensation, one driver was a drop of 0.9% in unit labor costs. Total output rose by 4.8% and the hours worked increased by 1.9%.

Nonfarm unit labor costs fell by 0.9% during the second quarter of 2018. While this may sound like a pay decrease, there was a 2.0% increase in hourly compensation. That 2.9% productivity increase more than offset the 2.0% rise in pay.

Manufacturing labor productivity increased by 0.9% in the second quarter of 2018, with total output rising 1.9% and a 1% gain in the hours worked. Over the past four quarters, the Bureau of Labor Statistics (BLS) reported that total manufacturing sector productivity decreased by 0.2%, with output up 1.8% and a 2.1% gain in hours worked. Unit labor costs in manufacturing rose by 0.6% in the second quarter of 2018 and increased by 2.7% from the same quarter a year ago.

This report comes at the same time that there are currently more job openings than there are available adults to fill the jobs. That number of openings was 6.66 million as of June, up over 500,000 from a year earlier.

It’s important to consider how this report looks compared with 2017. The BLS had shown data for 2017 throughout the first half of 2018 that was weaker last year. Productivity rose in 32 of 49 trade and food services industries in 2017. It had also shown in prior reports that productivity rose in 20 of 28 selected service-providing industries in 2017. Unfortunately, productivity declines in 2017 in 54 of 90 detailed manufacturing and mining industries during 2017.

While the relationship between productivity and unemployment is not unilateral, the reality over time is that higher and higher productivity actually competes with the level of employment. This theory comes from the notion that companies may have to hire fewer workers to grow if they are getting ever higher productivity out of the workers they already have. The other side of the coin is that increasing wages and employment costs tend to act as a drag on overall productivity.

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