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  • Productivity On Trend Line

Economy

04 May 2006

Productivity On Trend Line

  • By Bill Conerly
  • In Economy

Productivity (output per hour worked) grew at its long-run average growth rate last quarter.
Productivity

That long-run average is 2.5 percent, so we’re right on track.  Also in this report is an estimate of unit labor cost increase.  Unit labor cost is the cost of the labor that produces one physical unit of output.  Because labor is about two-thirds of the cost of producing goods and services, unit labor cost is the key indicator of how compensation costs and productivity interact to yield the dominant factor in production costs.  With that explanation, unit labor costs have risen 1.4 percent over the last four quarters.  That’s a quite reasonable, benign level.  Keep it in mind when wondering why prices have not risen more, despite sky-high fuel costs.

Business Strategy Implications:  Rising costs have not pushed inflation higher, but that’s because compensation increases have been mild recently.  Benefits costs have actually decelerated, without wage gains increasing.  However, tighter labor markets will probably change that over the coming year, producing a profit squeeze at many companies.

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