Productivity 2Q2012 (Preliminary): Growth of Unit Labor Costs Remain Moderate

Written by Steven Hansen

One almost needs to begin with the caveats at the end of this post, as productivity is in the eye of the beholder. My view of productivity is one of an industrial engineer, while the Bureau of Labor Statistics (BLS) are bean counters using a simple hours vs output approach.

Although one could argue that productivity improvement must be cost effective, it is not true that all cost improvement are productivity improvements.

A simple summary of this release is that the rate of productivity growth is not improving or declining, whilst the rate of growth of labor costs marginally increased after over a year of decline.  Overall, the increase of unit labor costs remain moderate.

Based on preliminary data , the Bureau of Labor Statistics reported that non-farm business productivity increased at an annual rate of  1.6% in the first quarter of 2012. The market was expecting  a increase of 1.5%. However, if data is analyzed in year-over-year fashion, output is flat as shown on the graphs below.

Unit labor costs (non-farm business) increased at an annual rate of 1.7% with the market expecting an increase of 0.4% to 0.5%.

Even though a decrease in productivity to the BLS could be considered an increase in productivity to an industrial engineer (see caveats below), this methodology does track recessions. The current levels are well above recession territory.

Seasonally Adjusted Year-over-Year Change in Output of Business Sector

But the output per person is on a two year “less good”track (negative second derivative).

Seasonally Adjusted Year-over-Year Change of Output per Hour

All this is happening while costs per unit produced remain subdued even after growing this month:

Seasonally Adjusted Year-over-Year Rate of Change of Unit Labor Costs

The headlines from the press release:

Nonfarm business sector labor productivity increased at a 1.6 percent annual rate during the second quarter of 2012, the U.S. Bureau of Labor Statistics reported today. The increase in productivity reflects increases of 2.0 percent in output and 0.4 percent in hours worked. (All quarterly percent changes in this release are seasonally adjusted annual rates.) From the second quarter of 2011 to the second quarter of 2012, productivity increased 1.1 percent as output and hours worked rose 2.9 percent and 1.8 percent, respectively. (See chart 1 and table A.)

Labor productivity, or output per hour, is calculated by dividing an index of real output by an index of hours worked of all persons, including employees, proprietors, and unpaid family workers.

Unit labor costs in nonfarm businesses increased 1.7 percent in the second quarter of 2012, while hourly compensation increased 3.3 percent. Unit labor costs rose 0.8 percent over the last four quarters.

Manufacturing sector productivity rose 0.2 percent in the second quarter of 2012, as output grew 1.7 percent and hours worked increased 1.4 percent. Over the last four quarters, manufacturing productivity increased 2.9 percent, as output increased 5.6 percent and hours rose 2.6 percent. Unit labor costs in manufacturing rose 0.3 percent in the second quarter of 2012 and decreased 2.9 percent from the same quarter a year ago.

Revised first-quarter 2012 measures of productivity and costs were announced for the nonfinancial corporate sector. Productivity increased 1.2 percent in the first quarter of 2012, as output and hours rose 4.7 percent and 3.4 percent, respectively.

Caveats Relating to Productivity

Productivity is determined using monetary criteria, and does not recognize outsourced man hours – in other words, if a business cuts half of its workforce by outsourcing a sub-component or sub-service, this would be a 50% productivity improvement.

These productivity measures describe the relationship between real output and the labor time involved in its production. They show the changes from period to period in the amount of goods and services produced per hour. Although these measures relate output to hours at work of all persons engaged in a sector, they do not measure the specific contribution of labor, capital, or any other factor of production. Rather, they reflect the joint effects of many influences, including changes in technology; capital investment; level of output; utilization of capacity, energy, and materials; the organization of production; managerial skill; and the characteristics and effort of the work force.

Econintersect believes a better measure (if you must use monetary tools to tract productivity) would be competitiveness.

Looking at productivity / output long term – output fall below 0% year-over-year change is a good sign that a recession is underway.  Another way to look at it – if productivity rate of gain is falling, this could be an indicator a recession is coming.

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