Productivity Crashes While Labor Cost Surges In Q1 2015

May 7, 2015 1 Comment

What better time to elaborate on my last blog post about labor cost and productivity than to discuss the recent productivity report.

We must also take the time to consider employment numbers in recent months, as all signs point to a slowdown in payroll growth. Even ADP (despite it being significantly less accurate than CES) has projected a slowdown in the amount of private sector hiring. Unit Labor Cost plays some part in the downward trend the economy seems to be experiencing.

As mentioned before, when wages are above productivity, firms have an incentive to reduce their workforce. This puts downward pressure on wages and upward pressure on productivity. Normally, this situation is self correcting; however, the economy has experienced two straight quarters of falling productivity, which hasn’t happened since 1993. It’s not necessarily a bad sign, but it shouldn’t be overlooked either.

If we expect the trend of falling productivity to continue, we can also expect employment gains to subside (which is responsible for the lackluster GDP growth).

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