Nonfarm business sector labor productivity—measured as output produced per hour worked—increased 3% in the last quarter of 2022 as output increased by 3.5% and hours worked increased by 0.5%. Strong labor productivity growth is good news for the labor markets and the Fed as it signals that businesses can absorb the increasing cost of labor without having to increase their output prices and fuel inflation higher. In the long term, a more productive workforce increases the overall standard of living in the U.S.
Here are the three takeaways from today’s productivity report:
1. Despite a sharp decline in the first two quarters of 2022, labor productivity is still 2.2% higher than what it would have been in the absence of the pandemic.
In the initial phase of the pandemic, businesses were able to adjust their employment levels swiftly reacting to the sharp decrease in consumer demand. Layoffs, particularly concentrated in support roles and those less crucial for driving production, combined with the accelerated adoption of remote work technologies, pushed labor productivity well above its trend. In the first half of 2022, as businesses restored support roles more quickly than they were increasing production, average labor productivity declined sharply. When we look at the overall trend, however, labor productivity is still 2.2% above the pre-pandemic trend line, indicating that the accelerated pace of technological adoption during the pandemic has likely made U.S. workers more productive for the long term.
2. Labor productivity decreased in manufacturing by 1.5% as a result of a 2.6% decrease in output and a 1.1% decrease in hours worked.
Despite below-trend production growth in manufacturing, the number of workers being laid off or discharged each month is still 53% lower than what it was before the pandemic. That suggests some degree of labor hoarding is taking place in manufacturing—that is, companies are holding onto workers who perhaps aren’t able to be fully productive due to lingering supply chain backlogs or sagging demand for manufactured goods.
3. Unit labor costs in the nonfarm business sector increased 1.1% in 2022 Q4.
This reflects a 4.1% increase in hourly compensation and a 3.0% increase in productivity. Unit labor costs increased 4.5% over the last four quarters. An increase in unit labor cost is one of the reasons behind the above pre-pandemic average wage growth rates we are seeing right now. However, as the wage growth moderates further, we are likely to see the unit labor cost flatten.