Today the BLS released its preliminary estimates of third quarter productivity and worker compensation.
Productivity increased 4.8 percent in the business sector, as output grew 4.3 percent and hours declined 0.4 percent. The 4.1-percent rise in nonfarm business productivity occurred as output rose 4.2 percent and hours rose 0.1 percent.
These productivity numbers are good; after all, it’s impossible to generate sustained increases in living standards without greater productivity. However, the compensation that workers earned did not fare so well: real compensation actually fell for the second quarter in a row.
This is both good and bad. Real compensation growth that is below productivity growth means that unit labor costs fell during the quarter. That’s good news for the US’s inflation prospects; if unit labor costs were rising, the pressures on inflation would rise as well.
But obviously, this is bad in terms of income and demand. If the compensation that workers are earning is not rising in real terms, then it will be hard for spending to rise, which in turn could spell trouble for the economy, as I mentioned in a previous post.
The following chart shows the trends in these variables over the past several years.
One unfortunate feature of the labor market since the recession of 2001 is that workers have seen their compensation lag behind the increased productivity that they have generated. This is somewhat unusual; over the past 50 years, the link between productivity and compensation has been pretty good, and deviations between the two have rarely lasted for long. Last year it appeared that compensation was finally starting to catch up a bit to higher productivity, but now it turns out that that was only a temporary improvement; over the past year productivity is up 2.9%, while real compensation only grew by 1.9%.
To me, this suggests that the labor market is still quite weak. And while good news on the inflation front, that could spell trouble for economic growth.
UPDATE: Those who are interested in understanding how to reconcile the different statistical measures of earnings growth may find this post useful: “Are Earnings Rising or Stagnant?“