Another Look at Productivity & Labor Costs

Today the Bureau of Labor Statistics released its look at Second Quarter 2019 Productivity and Costs.  The report prompted the question if the US is more productive, but at a cost.

In short, yes, we're more productive but it costs more.

In long, yes, but only for now, and for the wrong reason:

(1) Productivity--in this sense--is a function of aggregate output per aggregate number of hours worked.  Therefore, it's a key source of economic growth, as the strong correlation on the graph below demonstrates (r = +0.677 since 1951).  The BLS blurb says output rose 1.9%, but the hours worked shrank -0.4%.  So, we collectively did/made more in less time, resulting in productivity rising 2.3%.

Many economists (sorry, Keynesians) say that over the long term, GDP growth is only possible through productivity growth.

(2) Unit labor cost is just labor per unit of output produced.  BLS says it's the ratio of hourly compensation to labor productivity.  So naturally, it shows a negative correlation with productivity over the long term, like on the graph below (r = -0.677 since 1951).

This negative relationship implies productivity and unit labor costs tend not to rise with one another, unlike what's reported in today's BLS release.  The productivity growth may be due more to declining hours rather than improved output as GDP growth stalls. Want more on this topic?  Contact us to discuss.

 

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