Nonfarm business sector labor productivity increased at a 2.6 percent annual rate during the fourth quarter of 2010, the U.S. Bureau of Labor Statistics reported today.

Labor productivity is calculated by dividing an index of real output by an index of the combined hours worked of all persons, including employees, proprietors, and unpaid family workers. The more productive an employee the more they produce in an hour of work. A productive work force is essential if the economy is to grow at a faster rate. It is even more important when firms are laying off employees…the remaining work force is relied upon to perform additional tasks.

This gain in productivity reflects increases of 4.5 percent in output and 1.8 percent in hours worked.  Productivity increased 1.7 percent over the last four quarters. Annual average productivity increased 3.6 percent from 2009 to 2010.

The nonfarm business sector experienced productivity growth of 3.6 percent from 2009 to 2010 and 3.5 percent from 2008 to 2009. However, the 2010 increase in output per hour was due to a 3.7 percent increase in output as hours edged up 0.1 percent, whereas the 2009 productivity gain resulted when output fell 3.8 percent and hours fell 7.0 percent. In both years, strong productivity growth in nonfarm business was accompanied by declines in unit labor costs. By contrast the previous three years (2006-2008) were marked by modest productivity gains and increases in unit labor costs of more than two percent.


Quarterly measures provide information on business cycles whereas annual measures are compared to long-term trends. Well, this was the largest annual rise in productivity since 2002 and it was accomplished with a 3.7% jump in output!

Plain and Simple: HUMANS ARE AWFULLY PRODUCTIVE AT THE MOMENT...either that or robots are awfully productive when seasonal demand warrants. This is all happening without a huge jump in labor costs...

Unit labor costs in nonfarm businesses declined 0.6 percent in the fourth quarter of 2010, as the increase in productivity (2.6 percent) outpaced the increase in hourly compensation (1.9 percent).

BLS defines unit labor costs as the ratio of hourly compensation to labor productivity; increases in hourly compensation tend to increase unit labor costs and increases in  output per hour tend to reduce them. Labor costs make up about 70% of business expenses so if a company is not using their labor force effectively they could be wasting a lot of money!!

Over the last four quarters, unit labor costs declined 0.2 percent, as hourly compensation and productivity increased 1.5 percent and 1.7 percent, respectively. Annual average unit labor costs fell 1.5 percent from 2009 to 2010.

Not surprising at all. Wage growth, the main source of much needed demand pull inflation, has been absent from the recovery. All we're getting is cost push inflation and more expensive living costs (MARGIN SQUEEZE). There is a bright side to falling unit labor costs though. Labor is the biggest cost of production and these costs are usually passed down to consumers or companies pass along the losses to their P&L.  We need labor costs to decrease as productivity increases if we're going to avoid a major margin squeeze on Main Street and Wall Street. 

I wonder why labor costs are falling?

Now robots AND China are stealing jobs from our unskilled labor force!

We wrote this in December of 2009...

"With that in mind, if productivity remains at these high levels and demand (output) does not increase , businesses will have less incentive to hire new labor. Given the uncertain economic outlook, we should expect to continue to see employers offering temporary job opportunities as seasonal influences warrant. From a positive perspective,  the upward revision to unit labor costs and still extremely efficient read on productivity, while a function of less output,  does support the notion that the pace of layoffs will continue to slow.Furthermore, a more productive work force and still falling unit labor costs implies  greater corporate profitability. Perhaps the surge in productivity will lead to larger dividend payments to shareholders OR increased business investment spending....either way, consumer demand growth is a necessity if the overall economy is to stabilize and maintain a consistent growth rate. If you are an unemployed American looking for and re-educate yourself."

If you've been a long time MBS Commentary reader you know we had an ax to grind on labor productivity and its impact on hiring trends.  Many economists say a work force can only be so productive before it runs out of energy and firms are forced to hire just to keep up with demand. Humans are afterall only capable of producing so much output per hour before they get tired and need a break. Robots on the other hand do not need rest.  Robots also don't have health insurance premiums to pay or social security benefits to cover.  Businesses are investing in technology to improve productivity and reduce labor costs.  This is why we've been harping on education as a means to an end when it comes to giving guidance to the unskilled portion of our jobless labor force. Many of the jobs that were lost over the past two years will be lost forever to advances in automation.

Plain and Simple:  Welcome to the 21st Century, meet George Jetson. If you can't work the technology, good luck finding a job! Better get educated. (Jobless unskilled laborers should be hoping and praying for President Obama's Infrastructure Renewal Plan to take flight.)

All that being said, I’m curious…..HOW MIGHT HIGH LEVELS OF PRODUCTIVITY IMPACT HOME PRICES AND HOUSING DEMAND? On the surface it sounds terrible as it darkens the hiring outlook in the short run. I'm not sure yet about the long run yet,  but we're definitely doing some research on the topic. If you're interested in contributing let us know or simply share a comment below.