Worker Productivity In The US Plummets To New Record Low
Perhaps in what amounts to a direct reflection of the state of the US labor market, worker productivity has sunk to new lows.
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Worker productivity is bottoming out to new lows. A news release on Thursday from the Labor Department revealed that U.S. labor productivity dropped by 7.5% in the first quarter of 2022. This is the largest decline since 1947. Hourly compensation rose 3.2% in the period, but with the drop in productivity, unit labor costs climbed at an 11.6% rate in the first quarter. While the quarterly gain in hourly compensation adjusted for productivity likely overstates the degree of wage pressures, the 7.2% annual gain in labor costs was the largest since 1982.
According to CNN Business, In the midst of all of these challenges brought on by the COVID pandemic and the Russian invasion of Ukraine, the surging inflation of prices, and the increasing interest rates by the Federal Reserve stated they would raise their benchmark by borrowing at a rate increase of 50 basis points. “The trend in unit labor costs is running more than double the Fed’s inflation goal of 2%, signaling inflation pressures persist not only outside the U.S. with elevated commodity prices and still-knotted supply chains, but from within as the U.S. labor market remains exceptionally tight,” Sarah House, senior economist at Wells Fargo & Co., stated in a note to CNN.
The U.S. economy contracted last quarter for the first time since 2020, largely due to a wider trade deficit as companies imported more goods and services to support robust consumer demand. The business of non-farming output as measured by this report, which is about 75% of GDP, also decreased for the first time in nearly two years. That slowdown depressed the government’s measure of productivity growth.
Moreover, economic output declined at a 2.4% pace in the first quarter, according to the report. The hours worked, the other input in productivity calculations, increased by a whopping 5.5%. On a year-over-year basis, output per hour fell 0.6%.“The biggest quarterly drop in labor productivity since 1947 was paired with the fastest year-over-year increase in unit labor costs since 1982. Both results are exaggerated due to special factors that restrained the first-quarter figures, Covid-19, and a surge in imports, but reinforce pressure on the Fed to hike rates in the face of fast-rising prices and wages.” All of this data serves to show that worker productivity is reaching a critical nexus.
The fierce competition for a limited supply of workers has led businesses to bid up wages to attract and retain talent. By another measure, employment costs are now rising at a record rate in order to help limit the impact of rising costs on balance sheets. For instance, films often adopt new technologies or invest in equipment to make their workers more productive. Investing in other areas could cause companies to offer employees lower wages, which in turn, could have a direct impact on worker productivity.
Generally, rising productivity can help offset the inflationary impact of wage increases. Despite the rapid increases in wages, though, they’re still not keeping up with inflation. Real average hourly compensation fell an annualized 5.5% from the prior quarter after falling 0.5%. Separate Labor Department figures reflected that applications for state unemployment benefits climbed to 200,000 last week from 181,000. While the latest print is the highest since mid-February, jobless claims remain near a historic low.
