Labor Productivity Gain in the Third Quarter

By SBE Council at 7 November, 2024, 12:03 pm

by Raymond J. Keating -

Nonfarm business labor productivity grew by 2.2 percent in the third quarter, according to the latest report from the U.S. Bureau of Labor Statistics.

The third quarter's productivity performance was an improvement over 2.1 percent in the second quarter and 0.7 percent in the first quarter.

So, why should we care? What is labor productivity, anyway?

As noted by BLS, "Labor productivity, or output per hour, is calculated by dividing an index of real output by an index of hours worked by all workers, including employees, proprietors, and unpaid family workers."

Why does labor productivity matter?

Higher productivity is essential to economic growth, earnings growth for workers, and business profitability. Indeed, increased productivity is a win for everyone throughout the economy.

How does productivity improve?

Quite simply, it's through investments made by entrepreneurs creating new businesses and innovating; by businesses in general investing in efficiency gains, new technology, new methods, and improved tools; and by individuals investing in education and enhanced skills.

How do these recent productivity gains fit in versus what has been the average in the U.S.?

Well, the last two quarters were basically on the historical average. During the post-WWII period, average productivity gains registered 2.1 percent.

However, it also needs to be pointed out that since 2007, U.S. productivity has lagged badly. If we exclude the anomalous pandemic period (2020 and 2021), from 2007 to 2023, productivity growth averaged only 1.3 percent (1.6 percent with the pandemic years of 2020 and 2021 included).

Finally, labor productivity gains are not exactly straightforward. To get the full story, one needs to look at the two contributing factors, that is, output index and hours worked index. The best case scenario is when we see growth in both, but output index growth runs well ahead of hours worked. And that was the case in the third quarter, with the output index increasing by 3.5 percent and the hours worked index up by 1.2 percent.

Looking ahead in terms of public policies that affect productivity, the most important measures would be pro-entrepreneurship, pro-investment, pro-work changes in terms of tax and regulatory relief.

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council. His latest books on the economy are The Weekly Economist: 52 Quick Reads to Help You Think Like an Economist , The Weekly Economist II: 52 More Quick Reads to Help You Think Like an Economist and The Weekly Economist III: Another 52 Quick Reads to Help You Think Like an Economist .

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