A Step Back in Labor Productivity

By at 7 November, 2019, 3:02 pm

by Raymond J. Keating-

The U.S. Bureau of Labor Statistics has reported that nonfarm business sector labor productivity decreased 0.3 percent in the third quarter of 2019.

At the same time, it must be noted that productivity changes can be quite volatile form quarter to quarter.

This third quarter decline comes after two robust quarterly increases of 2.8 percent in the second quarter and 3.6 percent in the first quarter. (As noted by the BLS, “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.”)

So, thus far, the three quarter average for productivity growth in 2019 registers 2 percent. That runs ahead of the poor stretch of productivity experienced from 2006 to 2018, with a 1.3 percent average. But over the long haul, productivity growth averaged 2.3 percent during the post-World-War-II era to 2005.

It’s important to keep in mind that productivity matters because compensation in the marketplace is tied to productivity, as is, by the way, profitability. In turn, productivity is enhanced by investments in tools, equipment, technology, efficiencies, process improvements, education, skills, etc.

Therefore, one should expect to see enhanced productivity when business investment grows strongly – as was the case from the second quarter 2016 to the first quarter 2019 – and productivity suffers when investment falters. So, the recent decline in business investment experienced during the second and third quarters of this year warrant watching.

For all concerned about economic, productivity and income growth, policy costs and uncertainties must be reduced to incentivize investment.

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.

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