US labour costs rising faster than productivity

Productivity per non-farm worker in the US increased by 0.9 per cent in the second quarter, according to data from the Bureau of Labor Statistics.

This beat expectations of a 0.6 per cent increase and a vast improvement from a downwardly revised 1.7 per cent fall the quarter before. However, productivity was unchanged year-on-year.

Paul Ashworth, chief US economist at Capital Economics, says a stagnation in annual productivity probably won't impact monetary policy in the short term, but could result in a downwards revision of growth expectations if it continues.

Overall, the Fed's position seems to be that the economy's potential growth rate is around 2.5% (Based on its long-term forecasts for real GDP growth), which presumably is based on annual labour force growth of roughly 0.7% and productivity growth of around 1.8%.

But based on these new revised figures, productivity growth has been well below 2% for the last two years. Indeed, for most of that time, productivity growth has been below 1%.

That said, productivity growth can shift dramatically, often without warning, so this weakness may just be some pay back after the very strong productivity gains coming out of the recession. Furthermore, the US economy certainly doesn't appear to be in a cost-push inflationary spiral just yet.

Productivity per hour 2008-present:

Source: US Census Bureau

Meanwhile, the average cost of employing a worker in the country rose by 1.4 per cent. Analysts had expected to see costs rise by 1.2 per cent after a revised 4.2 per cent fall in the first quarter. Year-on-year, unit labour costs rose by 1.6 per cent.

Ashworth thinks that, if anything, officials at the Federal Reserve would probably like to see unit labour cost growth accelerating to avoid it continuing to undershoot its two per cent target.

Unit labour costs 2008-2013:

Source: US Census Bureau