ITR Experts Say: Productivity Is Rising - Are You Keeping Up?

US workers are becoming more efficient.

The Bureau of Labor Statistics reported that the US Nonfarm Labor Force Productivity Index was up 2.4% in the first quarter of 2019 from the same period one year ago. This 3/12 rate-of-change is higher than the historical average and represents the most rapid increase in labor productivity since 2010. Importantly, the Productivity Index is rising at an accelerating pace.

Labor force productivity is a measure of the total amount of goods and services produced compared to the number of hours that it took to produce those goods and services. You can think of this metric as output per worker hour. In the most recent data, output rose 3.9% from the prior-year level, while hours worked rose by just 1.5%. Essentially, the US workforce was able to produce more during the first quarter of this year without a proportional increase in hours worked.

Efficiency gains are a key way for businesses to remain profitable as wages rise. The US labor market remains historically tight, and overall wage growth is hovering around 3.5% as firms compete to attract talent. All too often, decision-makers are overly focused on controlling costs, potentially to the detriment of needed capacity. A more appropriate measure of expense may be unit labor costs, which measure the cost of labor per unit of output produced. Unit labor costs capture the comparison between compensation and productivity. In the first quarter, nonfarm business unit labor costs rose just 0.1% from the first-quarter-of-2018 level, the lowest pace of rise in five years. This means that over the past year, higher labor costs were almost entirely offset by increases in productivity.

Within the manufacturing sector, labor force productivity rose 1.2% from the year-ago level, while unit labor costs declined by 0.1%. These gains were driven by the durable manufacturing segment, where productivity rose by 1.6% and unit labor costs fell 0.8%.

Greater productivity will help you keep up with rising wages. Consider ways to help your employees become more efficient, whether through systems and process improvements, additional training, or other methods. Doing so will not only address rising labor costs but may help alleviate labor needs if you are struggling to hire workers in sufficient numbers in this tight labor market.

Rise in the Bureau of Labor Statistics’ measure of labor force productivity suggests that your competition may already be doing this.

Are you keeping up?

Lauren Saidel-Baker, CFA
Economist