Productivity & Labor Cost Data: Understanding Economic Efficiency
Deep dive into productivity data—labor productivity, unit labor costs, multifactor productivity, and why these metrics matter for inflation and growth.
Why Productivity Data Matters
Productivity is the foundation of:
- Long-term economic growth
- Living standards
- Wage sustainability
- Inflation dynamics
- Corporate profitability
"Productivity isn't everything, but in the long run it is almost everything." — Paul Krugman
Labor Productivity
Definition
Output per hour worked.
FRED Series: OPHNFB (Nonfarm Business) | IQ Score: 95
Formula:
Labor Productivity = Real Output / Hours Worked
Why It Matters
For growth:
GDP Growth ≈ Productivity Growth + Labor Input Growth
For wages:
Sustainable wage gains require productivity gains.
For inflation:
High productivity = Lower unit labor costs = Less inflation.
Historical Trends
US productivity growth (average):
| Period | Annual Growth |
|---|---|
| 1947-1973 | 2.8% |
| 1973-1995 | 1.5% |
| 1995-2004 | 2.5% |
| 2004-2019 | 1.3% |
| 2019-present | Volatile |
The productivity puzzle: Why did growth slow post-2004?
Release Details
BLS Productivity and Costs:
- Quarterly, preliminary ~5 weeks after quarter
- Revised with GDP data
- Significant revisions common
Unit Labor Costs
Definition
Labor cost per unit of output.
FRED Series: ULCNFB (Nonfarm Business) | IQ Score: 96
Formula:
ULC = Hourly Compensation / Labor Productivity
Or equivalently:
ULC = (Total Compensation) / (Real Output)
The Inflation Connection
ULC is critical for inflation:
- Rising ULC = Upward pressure on prices
- Falling ULC = Disinflation
Fed watches ULC closely.
Target: ULC growth ~2% (consistent with 2% inflation).
Interpreting ULC
| ULC Growth | Meaning |
|---|---|
| < 2% | Favorable for inflation |
| 2-3% | Neutral |
| 3-4% | Elevated (pass-through risk) |
| > 4% | Concerning (wage-price spiral risk) |
ULC vs Wages
Wage growth can be high if productivity matches:
- 4% wage growth + 2% productivity = 2% ULC ✓
- 4% wage growth + 0% productivity = 4% ULC ✗
This is why productivity matters for inflation.
Multifactor Productivity (MFP)
Definition
Output growth not explained by labor or capital inputs.
FRED Series: MFPNFBS | IQ Score: 91
Also called "Total Factor Productivity" (TFP).
Formula (simplified):
MFP = Output Growth - (Labor Contribution + Capital Contribution)
What MFP Captures
- Technological innovation
- Organizational improvements
- Efficiency gains
- Measurement error (unfortunately)
MFP Trends
MFP growth has been weak:
- AI enthusiasm hasn't (yet) shown in data
- Service sector harder to measure
- Quality improvements underestimated?
Sector Productivity
Manufacturing
FRED Series: OPHMFG | IQ Score: 94
Historically high productivity growth.
Automation, global competition.
Services
Harder to measure, slower growth.
Healthcare productivity especially difficult.
Sector Disparities
Manufacturing: Strong productivity growth
Services: Weaker productivity growth
Shift to services = Lower aggregate productivity?
International Productivity Comparisons
OECD Data
Standardized across countries.
Metrics:
- GDP per hour worked
- ULC indices
- Growth rates
US vs Peers
Productivity levels (US = 100):
- Germany: ~95
- France: ~98
- UK: ~85
- Japan: ~70
Convergence vs Divergence
Some catching up historically.
But US leadership persistent in many sectors.
The Productivity-Wage Link
Theoretical Relationship
Wages should track productivity (in theory).
Actual Experience
Pre-1973: Productivity and wages moved together.
Post-1973: Wages lagged productivity.
The divergence:
- Labor share of income declined
- Capital share increased
- Superstar firms effect
Policy Implications
- Minimum wage debates
- Union effects
- Profit margins
Productivity Drivers
Technology
- IT investment
- AI and automation
- R&D spending
Human Capital
- Education
- Training
- Health
Capital Deepening
- Equipment per worker
- Software per worker
- Structures
Institutional Factors
- Regulation
- Competition
- Labor market flexibility
Measurement Challenges
Services Productivity
How do you measure output of:
- Healthcare (quality-adjusted?)
- Education (learning outcomes?)
- Finance (value added?)
Digital Economy
Free services (Google, social media) not in GDP.
Quality improvements undermeasured.
Gig Economy
Hours worked harder to track.
Output attribution complex.
Building a Productivity Dashboard
Quarterly
- Labor productivity (OPHNFB)
- Unit labor costs (ULCNFB)
- Hours worked trends
- Compensation growth
Annual
- Multifactor productivity (MFP)
- Sector productivity breakdown
- International comparisons
- Capital investment trends
Complementary Data
- Wage growth (hourly earnings)
- Inflation (to compare with ULC)
- Corporate margins (productivity beneficiary)
Pro Tips
- ULC for inflation: The key Fed metric
- Revisions matter: Early prints noisy
- Trend > quarter: Quarterly data volatile
- Manufacturing vs total: Don't conflate
- Wages need context: Productivity-adjusted view
- AI skepticism: Until in data, speculation
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