The U.S. economy needs labor productivity to grow more than ever. Real labor productivity fell at an annualized rate of 0.3 percent in the third quarter, the first decline in nearly four years, the labor department said Friday.
The Wall Street journal reported that productivity data are usually extremely volatile compared to the previous quarter, but the long-term trend is also not encouraging. Labor productivity rose just 1.4 percent last quarter from a year earlier. That is in line with a modest increase in U.S. labor productivity over the 15 years starting in 2004, but is well behind the 2.5 percent average annual growth that ended in 2004.
To understand how fast the U.S. economy is growing, two key factors need to be mentioned: how much labor is produced and how efficiently it gets done. Economic growth, therefore, is the sum of total labor hours and productivity growth.
But as the U.S. population slows and the labor force ages, there is limited room to work longer hours, so worker productivity is now important to the U.S. economy. The U.S. economy is not going to grow until the productivity of its workers actually improves.
Unfortunately, American workers have not become more productive. Since the 2000s, American companies have continued to control capital spending, resulting in fewer labor-saving devices being introduced by companies. This phenomenon reflects the decline of the investment boom in the United States in the 1990s and a growing demand from investors for companies to control costs. Increased competition among large U.S. companies is a drag on profitability and ultimately hinders companies' ability to innovate, according to data released Thursday by the San Francisco federal reserve bank.
But as labor costs continue to rise, it may give companies more reason to invest in productivity, which is good news, at least in the long run. The labor department report showed unit labor costs rose at an annual rate of 3.1 percent in the third quarter, the fastest pace in more than five years. Unit labor cost refers to the compensation provided by the enterprise for employees' output. This could be an incentive for companies to introduce new equipment and train existing staff to improve productivity.
Deutsche Bank economists have found that workers are particularly prone to productivity gains when the search for talent is difficult and wages are accelerating. Moreover, with the federal reserve now willing to tolerate a much lower unemployment rate than before, the incentive for American companies to become more productive will only increase.