Productivity: The Latest Data and Historical Trends

By at 4 November, 2022, 8:44 am

by Raymond J. Keating –

Productivity is essential to income growth for workers, and vital to the profitability of businesses. And while often treated like a difficult puzzle to piece together, productivity growth stems from innovation; improved efficiency and operations; investment in technology, equipment and facilities; experience; and investment in education and skills.

However, measuring productivity during times of economic tumult gets tricky, and calls for caution and some drilling down beyond the headline number.

The Latest Data: Q3 2022

Having said all of this, nonfarm business sector labor productivity in the third quarter 2022, according to the latest report from the U.S. Bureau of Labor Statistics, increased at an annualized, seasonally adjusted rate of 0.3 percent. And compared to the same quarter last year, productivity declined by 1.4 percent.

As explained 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, in the third quarter, output increased 2.8 percent, while hours worked increased 2.4 percent, resulting in the 0.3 percent gain in productivity.

As for the comparison versus a year earlier, a 1.9 percent increase in output was coupled with a 3.4 percent increase in hours worked, resulting in the 1.4 percent decline in productivity.

Obviously, the pandemic economy has had a major effect on productivity data, with a recession, businesses shut down, employment plummeting, and then a job recovery getting under way. Therefore, we can basically toss out the 2020 and 2021 productivity data. But as we get into 2022, there’s more to consider as the pandemic effect diminishes.

The first two quarters of 2022 reflected the decline in real output.

-In the first quarter, productivity declined by 5.9 percent, with output down by 2.5 percent and hours worked up by 3.6 percent.

-In the second quarter, output declined by 1.2 percent and hours worked grew by 2.9 percent, resulting in a productivity decline of 4.1 percent.

-And as already noted, third quarter productivity increased by 0.3 percent, with output up by 2.8 percent and hours worked by 2.4 percent.

It’s worth noting that the gains in hours worked have been declining through the first three quarters of this year, which might reflect employment being an economic laggard relative to the slow economy.

Productivity and the Historical Trend

To put this all in perspective, going back to 1959, productivity growth has averaged 2.1 percent annually. Free from the distortive effects of major upheavals (such as the pandemic or the Great Recession), the last time the U.S. economy had a year that beat the average was 2005. We came close in 2019, with 2.0 percent growth. But after the Great Recession, productivity growth underperformed from 2011 to 2019.

The sweet spot when it comes to productivity is strong growth in both output and hours worked, with output growth running well ahead of the growth in hours worked. That’s where we need to get back to, and that will require increased entrepreneurship and investment, that is, the activities that generate the innovations and efficiencies that help drive productivity.

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council. His latest book is The Weekly Economist: 52 Quick Reads to Help You Think Like an Economist.


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