Productivity sags the most in 40 years as unit labor cost surges in Q3

Nonfarm business sector labor productivity decreased 5.0 percent in the third quarter of 2021, the U.S. Bureau of Labor Statistics reported today, as output increased 1.7 percent and hours worked increased 7.0 percent. This is the lowest rate of quarterly productivity growth since the second quarter

of 1981, when the measure decreased 5.1 percent. (All quarterly percent changes in this release are seasonally adjusted annual rates.) From the third quarter of 2020 to the third quarter of 2021, nonfarm business sector labor productivity decreased 0.5 percent. The four-quarter rate is the lowest rate since the third quarter of 2011, when the measure also declined 0.5 percent

Unit labor costs in the nonfarm business sector increased at an annual rate of 8.3 percent in the third quarter of 2021, reflecting a 2.9-percent increase in hourly compensation and a 5.0-percent decrease in productivity. Unit labor costs increased 4.8 percent over the last four quarters. BLS

calculates 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 productivity tend to reduce them.

Labor productivity, or output per hour, is calculated by dividing an index of real output by an index of hours worked by all persons, including employees, proprietors, and unpaid family workers. The third quarter of 2021 is the fifth consecutive quarter with increases in both output and hours worked,

following historic declines in those measures in the second quarter of 2020. The output index is now 1.8 percent above the level seen in the fourth quarter of 2019, the last quarter not affected by the COVID-19 pandemic, while the hours worked index remains 1.0 percent below its fourth quarter 2019 level.

The nonfarm business labor productivity index is 2.9 percent higher in third-quarter 2021 than it was in fourth-quarter 2019, corresponding to an average annual growth rate of 1.6 percent during the pandemic period of fourth quarter 2019 through third quarter 2021. This rate is slightly higher than the 1.4-percent average annual growth rate during the previous business cycle--from 2007 to 2019--but below the long-term average rate since 1947 of 2.1 percent.

Manufacturing sector labor productivity decreased 1.0 percent in the third quarter of 2021, as output increased 5.7 percent and hours worked increased 6.7 percent. In the durable manufacturing sector, productivity increased 1.4 percent, with a 9.9-percent increase in output and an 8.4-percent increase in

hours worked. Nondurable manufacturing sector productivity decreased 2.6 percent, as output (+1.3 percent) grew slower than hours worked (+4.0 percent). Total manufacturing sector productivity increased 2.4 percent from the same quarter a year ago.

Manufacturing sector output is now 1.1 percent above its level in the fourth quarter of 2019, the last quarter not affected by the COVID-19 pandemic. Hours worked in manufacturing remain 3.3 percent below the fourth-quarter 2019 level. The manufacturing labor productivity index is now 4.6 percent

higher than in fourth-quarter 2019, reflecting growth at a 2.6-percent annual rate during the pandemic period of fourth quarter 2019 through third quarter 2021. This rate is much higher than the 0.2-percent average annual growth rate during the previous business cycle--from 2007 to 2019--and is just above the long-term rate of 2.3 percent per year from 1987 to 2020.

Unit labor costs in the total manufacturing sector increased 2.9 percent in the third quarter of 2021, reflecting a 1.9-percent increase in hourly compensation and a 1.0-percent decrease in productivity. Manufacturing unit labor costs increased 1.9 percent from the same quarter a year ago.