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Bureau of Labor Statistics/Megan Jonas/MEDILL
Business productivity rose the last year, despite falling labor costs.
Labor costs fall, productivity rises in 2010
by Megan Jonas
Feb 03, 2011
For the quarter ended Dec. 31, non-farm business sector productivity increased 2.6 percent, beating expectations of economists surveyed by Bloomberg LP. The rise in productivity caused labor costs to fall despite rising compensation costs. Labor costs fell 0.6 percent compared with the economists’ prediction they would increase by 0.2 percent.
Jeff Sica, president and chief investment officer of Sica Wealth Management LLC, sees increased productivity as a leading indicator for a future pick up in employment. “Anytime I see improvements in the productivity numbers, what it generally points to is the potential that there will be hiring down the line,” he said.
A 9.4 percent unemployment rate coupled with high productivity points to the fact that “People are willing to work harder for less,” said Sica. “Tomorrow’s [unemployment] numbers will prove that the productivity gains are not translating into jobs.”
But Sica does see the past two quarters of productivity growth as leading, eventually, to job growth, which he expects to see in lower unemployment later in the year. “We expect that now that these companies have squeezed whatever they can out of their employees, they’ll make the decision to hire new employees,” he said.
Productivity measures the relationship between real output and labor time involved in production. Labor costs measure the relationship between hourly wages and compensation and hourly output. When wages rise, labor costs rise but they are often offset by rising productivity.
Companies saw an increase in hourly compensation last quarter, but workers may not have seen an increase in wages. The compensation figure includes employer contributions to benefits such as health insurance or retirement savings. “Workers don’t perceive that they enjoy a higher level of compensation,” said Michael Englund, chief economist for Action Economics LLC. They are getting the same type of benefits, but at a higher cost to their employers, he added.
Historically, productivity and labor costs have followed the business cycle, Englund said. From the post-war period until the late 1990s, productivity rose and fell with the economy. But in the latest recession, the numbers were less correlated. “If businesses are investing, productivity should go up,” he said. But businesses are producing more and more with less investment, making future predictions on productivity difficult.The Bureau of Labor Statistics will release revised numbers for the fourth quarter March 3.
