Bloomberg details and defines unit labor costs:

Unit labor costs in nonfarm businesses increased 1.2 percent in the fourth quarter of 2011, as productivity grew at a slower rate (0.7 percent) than hourly compensation (1.9 percent). Unit labor costs rose 1.3 percent over the last four quarters. Annual average unit labor costs increased 1.2 percent from 2010 to 2011.

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.

The good news... there is no inflationary pressure whatsoever at the moment in labor. The bad... this is because the labor market is soft (though hopefully we see some more positive signs tomorrow morning).

An ugly (yet improving) chart shows the number of hours worked per person...

Bloomberg details (bold mine):

The productivity of U.S. workers unexpectedly increased in the fourth quarter at a faster rate as companies sought to contain costs.

The measure of employee output per hour rose at a 2.6 percent annual rate, compared with a revised 2.4 percent gain in the previous three months, figures from the Labor Department showed today in Washington. Economists projected a 2 percent advance, according to the median forecast in a Bloomberg News survey. Labor expenses fell for fifth time in six quarters.

“There is a good chance that productivity will slow further this year, as firms are increasingly forced to hire more workers to expand output,” Paul shworth, chief U.S. economist at Capital Economics Ltd. in Toronto, said in a note to clients. “That is good news for the unemployed.”

Source: BLS

As everyone is familiar with, the productivity spike following the economic downturn was initially met with a HUGE drop in hours worked and employment. As detailed previously:

The initial increase in productivity was never due to doing more, with less. It was doing less with (an even larger) less.

The below chart shows that things have evolved (for the good) and that both productivity and hours worked have increased year over year.



Now compare the above year over year figures with the below quarter over quarter (annualized) figures. What we see is that productivity growth (and output) remains strong, but at a decreasing rate.



Shown another way (subtracting the year over year growth in chart 1 from the quarter over quarter growth in chart 2) and we can see clearly that the pace of growth in output has decreased as productivity has decreased and hours worked have not increased enough to offset the decline (again this is in terms of the second derivative of output - there is still outright growth).



What does this all mean to me?

Well, the manufacturing portion of the charts are an interesting study because the collapse in manufacturing was larger and the rebound swifter (though still WAY below the old trend). What initially happened was a huge spike in productivity as jobs were shed by the millions. Later, productivity continued to increase while hours worked eased higher (not necessarily through hiring). When manufacturers got all they could out of this remaining workforce, to meet demand they were forced to... wait for it... actually hire (hence, the jump in labor cost per unit).

This is what is happening, albeit more slowly, in the broader economy. The problem is there is still so much excess capacity in the system that companies are still able to squeeze more out of their existing labor force (i.e. there is still room for additional productivity growth and hours to be increased). I do think we are fast approaching the inflection point as cost cutting has run its course and corporations are now looking to grow the top line to grow profits. Considering the limited investment over the past few years, to meet output (it is my hope) corporations will need to once again rely on labor.

Source: BLS

BusinessWeek details:

The productivity of U.S. workers rose more than forecast in the third quarter as companies redoubled efforts to rein in costs amid signs the recovery was cooling.

A measure of employee output per hour increased at a 1.9 percent annual rate after falling 1.8 percent in the previous three months, Labor Department figures showed today in Washington. The median forecast of economists surveyed by Bloomberg News projected a 1 percent gain.

Don't look now, but productivity as defined by output per hour AND hours worked are both increasing.



Source: BLS

The economy can grow one of two ways... an increase in the number of people working (i.e. employment) or getting more out of these workers (i.e. productivity). Over the last few years the employment side has been horrendous, but has been (partially) offset by a jump in productivity (i.e. getting more out of the existing workforce).



The issue (as I see it) is the longer trend that can be seen above. Employment has been on a 30 year slowdown in terms of growth, while productivity has just recently slowed following a 20+ year period from a consistent rise from the early 80's through early 00's (lack of investment?).

Source: BLS / BEA

Reuters details:

U.S. non-farm productivity fell more steeply than previously estimated in the second quarter, posting its largest decline since the third quarter of 2006, according to government data on Thursday that underscored the sputtering economic recovery.

Productivity contracted at an annual rate of 1.8 percent, the Labor Department said, instead of the previously reported 0.9 percent pace.

Productivity, a measure of hourly output per worker that is taken as an indicator of the economy's vitality or lack of it, increased at a 3.9 percent rate in the first quarter. Markets had expected productivity to drop at a 1.9 percent pace in the April-June period.

This is somewhat misleading. During the crisis when productivity spiked, bulls said this proved the the case for a quick rebound (which also wasn't true). As EconomPic detailed:

The WSJ reports:

U.S. productivity unexpectedly fell in the second quarter, the first drop in 18 months, amid slower output growth and an increase in labor costs. Nonfarm business productivity dropped at a 0.9% annual rate in the April to June period, the Labor Department said Tuesday. It was the first decline since the fourth quarter of 2008, when productivity fell by 0.1%.

The strong gains in productivity growth, which ranged from 3% to 8% in 2009, are likely over. Productivity usually picks up sharply at the end of recessions. The recovery has been in place for more than a year now, and the economy slowed in the second quarter compared to the previous two quarters.

The chart below shows it all. The increase in productivity was never due to doing more, with less. It was doing less with (an even larger) less.



The recent drop in productivity is (to me) not a bad sign. It is simply the decrease in marginal returns from bringing workers and capacity back into the system. In other words... the jump in productivity wasn't as great a thing as some thought, while the decline is not as bad as many now think.

Source: BLS

Reuters details:

U.S. non-farm productivity growth slowed sharply in the first quarter, government data showed on Thursday, suggesting businesses will have to raise employment to boost output.

The Labor Department said non-farm productivity rose at a 3.6 percent annual rate, the smallest advance in a year, after expanding at a brisk 6.3 percent pace in the fourth quarter.

Analysts polled by Reuters had forecast productivity, which measures the hourly output per worker, rising at a 2.5 percent rate in the January-March period.

Productivity expanded rapidly in the previous three quarters as businesses wrung more output from a small pool of labor. Despite the resumption of economic growth, firms have been reluctant to hire new workers, opting instead to increase working hours. With productivity slowing, they may need to start hiring workers to keep production up.

The Economist details:

Producing more by working less is the key to rising living standards, but in the short term there is a tension between efficiency and jobs. America and Europe have managed this trade-off rather differently.

America has gone on a diet: it has squeezed extra output from a smaller workforce and suffered a big rise in unemployment as a consequence. Europe, meanwhile, is hoping to burn off the calories in the future. It has opted to contain job losses at the cost of lower productivity. That probably means America’s recovery will be swifter. Further out, productivity trends in both continents are likely to be uniformly sluggish.

Below is a chart showing just how varied the economic results have been between the U.S. and the fifteen member EU-15 have been.



Longer term, the chart below shows just how much more the United States has been able to squeeze out from its workers over the previous few decades (and I threw in Brazil to show just how sizable the growth potential is for emerging market countries simply to "catch-up" to the developed world).



The interesting thing is related to timing of the chart. Just a few years ago when unemployment was much lower and average hours worked per week was much higher, the chart would have looked much different. It was at that point in time that the European countries were more productive with their workforce as they tended to work much less.

Now the question becomes how much more will we really be able to squeeze out of those workers left? At some point that answer is "not much" and companies will be forced to hire.

Source: Conference Board / The Economist

The Business Financial Newswire reports:

Marketwatch reports:

WSJ reports:

Both the U.S. and South Korea saw productivity rise 1.2% in 2008, the first full year of the recession, from 2007. They experienced the largest increases of the 17 countries included in the Labor Department's international manufacturing-productivity report released Thursday. Productivity, which is defined as output per hour worked, declined in 12 of the countries, with the largest drops in Singapore and Denmark.

In the U.S., "productivity growth in manufacturing has been above that in services for some time," said Mike Elsby, an assistant professor of economics at the University of Michigan. "Put another way, manufacturing has been progressively doing more with less for 40 years. Consequently, I would expect it to continue."

Over the long run, productivity is key to improved living standards because it spurs rising output, incomes and asset values. But in a down economy, improving productivity with existing workers might mean hiring fewer new ones.

Source: BLS

More news from yesterday...

Marketwatch with the details:

Productivity rose in the first quarter as U.S. firms slashed their workforce, outpacing the drop in output, the Labor Department reported Thursday. Productivity in the nonfarm business sector - output per hour worked - rose at a seasonally adjusted annual rate of 0.8% in the quarter as output fell 8.2%, while hours worked fell 9% -- the largest drop in hours since 1975.

Economists polled by MarketWatch had expected no change in productivity, and a 3% gain in unit labor costs. Compared with the first quarter in the prior year, productivity was up 1.8%, while unit labor costs rose 2.4%. Within manufacturing, productivity fell 3.4%, while output fell a record 22.4% and hours declined a record 19.7%. The data go back to 1987. Unit labor costs in manufacturing rose 16.7%.

Source: BLS

Bloomberg reports:

U.S. worker productivity in the fourth quarter unexpectedly fell as the economy shrank even faster than companies cut jobs and hours.

Productivity, a measure of employee output per hour, fell at a 0.4 percent annual rate, the first decrease in a year and much less than the 3.2 percent gain estimated last month, the Labor Department said today in Washington. Labor costs climbed 5.7 percent, more than prior projections.

The figures, coming a day before the government’s employment report, indicate companies will keep cutting jobs to contain escalating losses. Deteriorating labor and housing markets will sap consumer spending further, magnifying the risk this recession may turn out to be the worst in the postwar era.

Source: BLS

Bloomberg reports:

Manufacturing in New York contracted in February at the fastest pace on record, signaling the recession that began more than a year ago is intensifying.

The Federal Reserve Bank of New York’s general economic index fell to minus 34.7, the lowest level since records began in 2001, from minus 22.2 percent in January, the bank said today. Readings below zero for the Empire State index signal manufacturing activity is shrinking.

Source: New York Fed

Businesses: Production per hour up. Hours down. Total Production modestly down.

And it is only getting worse.

Source: BLS