Productivity losses in 2022

Productivity losses in 2022

The latest Bureau of Labor Statistics (BLS) report on labor productivity in the U.S. business sector for the second quarter 2022 shows output per hour falling at a 3.6 percent annual rate following a similar decline in the first quarter.  This decline reflects a 2.3 percent rate of gain in hours worked along with a 1.4 percent decline in output growth.  This, combined with a 6.1 percent growth rate in compensation, pushed the unit labor costs higher at an annualized rate of 10.1 percent.

Over the year, 2nd quarter 2021 to 2nd quarter 2022 unit labor costs jumped 9.4 percent. And despite a 6.9 percent rise in labor compensation and a 4 percent increase in total hours worked, real worker compensation, in reality, fell 1.4 percent over the period.  And with year-over-year inflation still over 8 percent in July and August, real earnings no doubt declined further.

The worrisome news that labor productivity is declining and unit labor costs are rising suggests that despite ongoing hiring, companies will need to continue raising prices to avoid profit declines.  With demand constantly being stoked by huge government spending with deficits and, until recently, a very accommodative monetary policy, demand has remained strong. Given the labor productivity declines that have stymied output gains, supply has not been able to catch up.  The cause of the productivity drops is mostly limited to services production.  Manufacturing has not seen a falloff in productivity.

This situation likely reflects the changes that have occurred with many service employees not coming to the office to work. In goods production, most jobs cannot be done remotely; manufacturing lends itself more readily to productivity improvements through technology and efficiency gains through work-flow designs and time-saving innovations.

Then, too, many jobs in the service sectors such as retail, education and leisure and hospitality have historically had relatively low productivity and very slow gains in real output per worker.