Q4 Productivity & Unit Labor Costs: No Inflation Pressures Here

February 2, 2006 – Beyond the quarterly volatility, U.S. nonfarm businesses’ labor productivity rose by a solid 2.3% last year (measured Q4 to Q4). That’s roughly apace with 2004’s 2.6% increase (Chart 1).

Chart 1. Percent change in labor productivity. Q1 1960 through Q4 2005.

We saw much stronger productivity gains earlier in this expansion, but those stronger increases relied on falling (or stagnant) employment. That wasn’t a sustainable trend for the long haul.

Growth in nonfarm businesses’ hourly labor compensation slowed to just 3.3% last year (also measured Q4 to Q4). The comparable increase for 2004 was 5.8% (Chart 2).

Chart 2. Percent change in hourly labor compensation. Q1 1960 through Q4 2005.

Nonfarm businesses’ output prices rose by 3.1% over the four quarters through Q4 (+2.7% in 2004). Thus, their real compensation costs edged down by 0.4% last year, compared to a 2.4% increase in 2004.

Reflecting this reduced compensation growth, nonfarm businesses’ unit labor costs (productivity-adjusted compensation costs) rose by just 1% last year (Q4 to Q4), compared to a 3.2% rise in 2004 (Chart 3).

Chart 3. Percent change in unit labor costs. Q1 1960 through Q4 2005.

For this same time frame, nonfarm businesses’ real unit labor costs fell by 2.1% last year, after edging up by 0.4% in 2004.

Bottom line: The FOMC’s fears of rising inflationary pressures in the labor market had yet to be realized, as of Q4 last year.

Suzanne Rizzo