Productivity Increased Further in 1st Quarter

Labor productivity continued to grow in the first quarter of 2010, according to the Bureau of Labor Statistics. While the period's 3.6% annualized rise was significant, it was the smallest gain since the first quarter of 2009. Last quarter, productivity increased by 6.3%. This trend is not unexpected: as unemployment begins to decline, productivity won't grow as quickly.

Worker productivity is the measure of output per hour worked. The following graph demonstrates the trend, updated through last quarter:

prod v unemp 2010-q1.PNG

If you look at some of the other unemployment peaks (in red) above, you can see how productivity growth (in blue) took a dive as unemployment began to decline.

There is some causal relationship here: worker productivity is not unlimited. As output increases, hours worked must increase too -- which means additional workers must be hired. When a recession hits, firms can cut their labor costs to the bone and demand more of their workers for a time. Eventually, however, hiring is unavoidable as the economy strengthens.

In this case, productivity growth was lower mostly because output growth declined from 7% in the final quarter of 2009 to 4.4% in the first of 2010. Hours worked were nearly flat. As consumer demand continues to grow, output will have to rise, so hours worked much catch up to keep productivity at a manageable level.

Meanwhile, labor costs further declined by 1.6% last quarter. Again, this trend appears to be slowing, as the costs had declined by 5.6% in Q4 and 7.6% in Q3. As labor costs continue to decline, firms will find it easier to hire going forward. Here's a chart showing labor costs based on an index beginning in 1970:

labor costs 2010-q1.PNG

Note: All data is seasonally adjusted.