Higher Wages and Longer Working Hours Offsetting Output Gains

The United States experienced its largest productivity decline since 1947 during the first quarter of this year, according to new data from the U.S. Bureau of Labor Statistics.

Labor productivity for the nonfarm business sector fell 7.3 percent for the first three months of 2022, as output decreased 2.3 percent and hours worked increased 5.4 percent. Over the past year, labor productivity has fallen 0.6 percent as a 4.2 percent increase in output was offset by a 4.8 percent increase in hours worked. That represents the largest four-quarter decline since 1993.

Part of the productivity decline can be attributed to rising wages. The first quarter saw a 4.4 percent increase in hourly compensation. Taken with the decline in productivity, unit labor costs for the nonfarm business sector are up 12.6 percent for the quarter and 8.2 over the past year – the largest such spike since Q3 of 1982.

But while the overall economy is seeing a reduction in productivity versus labor costs, manufacturers actually saw an improvement in Q1. Manufacturing sector labor productivity rose 0.2 percent for the quarter, as the 4.9 percent in hours worked was less than the 5.1 percent increase in output. As such, manufacturing output is now 3.1 percent higher than in Q4 2019, the last quarter not impacted by the COVID-19 pandemic.

Those results correspond with findings from the Federal Reserve Bank of St. Louis, which shows that industrial production of commercial and service industry machinery is on the rise. The agency’s monthly index for the sector stood at 108.0122 in April, the highest level since July 2014 and a significant turnaround since falling to 90.9683 at the start of the pandemic.