Second Quarter Productivity and Labor Costs
Productivity: Up 1.6%; Unit Labor Costs: Up 1.7%; Compensation: Up 3.3%
IN A NUTSHELL:
“Workers are working harder, but getting a little more money as well.”
WHAT IT MEANS:
Businesses are in the drivers’ seat when it comes to hiring and pay these days, and that is part of the reason that job, and more importantly income, gains are so weak.
With so much uncertainty about the future, executives are looking to keep their biggest cost, labor, at a minimum. They do that by ramping up productivity, which occurred in the second quarter. A moderate rise in production was created by only a modest increase in hours worked, leading to a decent, though not great, rise in productivity in the spring. The jump in output per hour came after a decline during the first quarter of the year.
Interestingly, the manufacturing sector, which is usually the driving force for productivity increases, saw only a modest rise. But firms in that part of the economy were better at keeping labor expenses under control.
Outside manufacturing, compensation jumped, which is quite strange, as we did not see that in other reports. Still, unit labor costs, which are the best measure of the impact of labor expenses on goods, rose at a very reasonable pace and a lot lower than earlier this year.
MARKETS AND FED POLICY IMPLICATIONS:
In this political environment, every economic number undergoes the” jobs test.” That is, what does this report imply for payroll growth? Unfortunately, the relationship between productivity and jobs depends upon where you happen to be in the business cycle.
For example, in 2008 as the economy began to falter, productivity was terrible because output was declining faster than firms were cutting workers. But in 2009, with the economy crashing and burning and payrolls disappearing at a breathtaking pace, productivity soared.
So did the weak productivity in 2008 lead to the job losses in 2009? No.
It was the economy that was driving hiring decisions and the lag between economic activity and payroll changes determined the change in productivity. Similarly, as the economy improved in 2010, hiring was slow to respond and productivity gains were strong.
So, it is not productivity leading hiring, but the economy driving payrolls, though with a lag that determines productivity.
What does this mean for this year? The sluggish economy means firms will be under earnings pressure so they will not be hiring lots of workers, but will instead be creating additional output through productivity gains.
Will this lead to faster increases in labor income? Not necessarily. In a slowly expanding economy, productivity gains need to be solid enough to support decent increases in compensation.
Thus, the real story here is that workers, who are facing limited job openings, will also see their incomes grow minimally. That does not bode well for future consumer spending or economic growth.
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