Thursday, September 2, 2010

Labor Productivity Revised Down to 1.8% Decline; Unit Labor Costs Rise 1.1%

Labor productivity was revised downward for Q2 to decline of 1.8% on a seasonally adjusted, annualized basis. This compares to the previously reported decline of 0.9%. The drop ended five quarters of very strong prodcutivity growth. The growth rate had been decelerating for the past year, and the change represents a transition into the next period of economic recovery. In early stages of expansion, as has been the case the past year, productivity surges as firms find new ways to get more out of their existing labor forces. Therefore, GDP growth occurs without a lot of new hiring. Productivity growth is required in the long run if incomes are to grow, but in the short run it reduces the demand for new hires. However, at some point, firms existing labor forces cannot continue to produce more and new hiring is required. Assuming that the economic recovery does not stall, new employment growth will likely soon begin.

Over the quarter, output per hour of labor fell by 1.8% annualized, while compensation per hour fell 0.7%. At least part of the compensation decline was likely due to the mix of workers as firms have begun to hire new entrants that tend to have lower starting wages. Unit labor costs, the measure of cost of a unit of output per hour, rose 1.1%, the first increase since Q2 of 2009. Even with the increase, inflationary pressure from the labor market will remain minimal as heavy slack still persists.

10.09.02 (Source: Bureau of Labor Statistics)

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