Second Quarter 2018 Productivity and Unit Labor Costs

Productivity surged during the second quarter of 2018 according to the Bureau of Labor Statistics.  After rising just 0.4 percent in the first three months of this year, the measurement of output-per-labor-hour hit 2.9 percent, reaching the highest level since the first quarter of 2015.  Year-over-year, this measure of efficiency is up 1.3 percent, the best reading since the third quarter of 2017. 

Labor productivity has two components, and each of them increased.  First, a measure of output is calculated; this inflation-adjusted index increased 4.9 percent from April through June on an annualized basis.  Secondly, an index of hours worked by all persons, including employees, proprietors, and unpaid family workers, is computed; it improved 1.9 percent in the period.  Combining these two pieces leaves an improving productivity rate of 2.9 percent.

Unit labor costs are also included in this release, giving some insight into how much labor expenses are influencing the price of goods and services.  When productivity grows, labor costs tend to fall, and when wages rise labor costs tend to increase.  But what happens when both of these phenomena occur as was the case last quarter? Well, it depends.  Fortunately, productivity rose faster (+2.9 percent) than wages (+ 2.0 percent), so unit labor costs declined 0.9 percent in the quarter.  Including this most recent drop, year-over-year unit labor costs are up 1.9 percent.

July’s iteration for productivity and unit labor costs was strong.  An impressive performance by the American economy helped this indicator, but its components of output (labor and capital) were more productive than a quarter earlier.  A more efficient economy allows jobs to be created, wages to rise, as well as more goods and services to be consumed without igniting inflation, thus improving standards of living.  In general, these are good times for the American economy.