I’ll be brief, because first and foremost, the recent uptick in productivity growth that I’m about to show you may be statistical noise. These are jumpy data. But in case this sticks, I did want to lay down a marker and tout some potential implications.
This morning’s revised productivity report has output per hour up a rousing 3 percent in Q3. That’s an annualized, quarterly rate, and OTE’ers know I like to filter out some of the noise by looking at year-over-year changes.
So, the table below shows the recent acceleration in year-over-year changes in the key variables.
Since productivity growth equals output minus hours growth, we can decompose the increase. It’s all about faster output growth; hours of work have slowed a touch.
Now, there could be a bit of the hurricane season in there, as that hurts employment but boosts (gross) output. Also, as we close in on full employment, employment and hours growth will naturally slow.
What’s a bit disconcerting here–with even bigger caveats re data noise in this series; I’m pretty skeptical of this wage result–are the unit labor costs, which measure compensation growth relative to productivity growth. We typically expect pay to rise along with productivity growth, at least at the average (if not so much the median), especially as the job market tightens. And, as Dean Baker and I point out here, you see real wage pressures in some series. But compensation slows of late in this series. And slower compensation amidst faster productivity growth drives down unit labor costs.
That dynamic–productivity rising faster than comp–also drives down labor’s share of national income, as the next figure shows (the BLS labor share data is more pessimistic than other series; part of the decline is due to imputations of self-employed earnings, but all measures show a similar trend).
Towards the end of the figure, if you squint you can maybe see the beginning of a trend reversal around 2015, but the series has since turned down again. It’s an unsettling picture of where most income growth has gone in recent decades.
At any rate, if this productivity acceleration sticks, and that’s a big “IF,” here are some implications:
–The Fed has even less reason to raise rates, as faster productivity growth can pay for non-inflationary wage gains.
–Score one for the full-employment-multiplier theory a number of us like to tout. As the job market tightens, firms must find new efficiencies to maintain profits margins as production costs rise (another reason the wage result above looks fishy to me).
–Get ready for a lot of ridiculous claims that the tax cut and MAGA are responsible for the acceleration.