Labor productivity serves as a key indicator of an economy’s efficiency, reflecting the amount of goods and services generated per hour of labor. Typically, higher productivity is linked to economic growth, rising wages, and enhanced living standards. However, the post-pandemic period raises the question of whether inflation-adjusted (i.e., real) hourly compensation has kept pace with these productivity gains. Here, we explore trends in labor productivity and real hourly compensation from the first quarter of 2020 through the second quarter of 2024.
On August 1 2024, the Bureau of Labor Statistics (BLS) released its quarterly report titled ‘Productivity and Costs.’ This report provides data on three important indicators of the labor market, both for the overall private sector and for industry sectors. The first indicator reported is labor productivity, which is calculated as a measure of output divided by a measure of hours worked. Increases in labor productivity are considered a positive development, as this indicates more output is produced from a given level of labor inputs. The second indicator is hourly compensation, which reports the average cost to employers of an hour of labor, including the employer-paid portion of payroll taxes, pension contributions and health insurance premiums. The third indicator reported is unit labor cost, which is calculated as hourly compensation divided by productivity, and shows the cost a firm incurs from hiring a unit of labor.
Source: Bureau of Labor Statistics
In this post, we will concentrate on these three key metrics to describe productivity and cost trends in the labor market. The data is from the Bureau of Labor Statistics, Office of Productivity and Technology (OPT). Figure 1 shows labor market conditions using these three metrics, labor productivity, hourly compensation, and unit labor cost, within the nonfarm business sector from Q1 2020 through Q2 2024. We deflate all monetary values by the CPI to calculate inflation-adjusted or “real” values. Over this period, overall labor productivity increased at an average annualized rate of 1.7%, while real hourly compensation grew at an average annualized rate of 0.7%. The faster growth of productivity relative to real hourly compensation means the real unit labor costs decreased at an annual rate of 1%.
Labor productivity (light blue line), represents the output produced per hour worked. In the initial weeks following the outbreak of the pandemic, the labor market experienced a significant shock, with roughly 20 million jobs lost and the unemployment rate soaring to 14.8% by April 2020. Despite this unprecedented loss of jobs, labor productivity grew by 6% from the first to the third quarter of 2020. This can be attributed to more job losses in low-productivity sectors, leading to higher calculated productivity from those still working. The Leisure and Hospitality sector experienced the most significant decline in jobs, with employment dropping from 16.1 million in March to 8.7 million in April—a 46% reduction. Other sectors, such as Professional and Business Services, Manufacturing, Education, and Health services, along with Trade, Transportation, and Utilities, experienced smaller declines of 10% to 11%. Labor productivity declined with the recovery of these low-productivity sectors in 2022, but has since increased, reaching its post-pandemic high in Q2 2024.
Real hourly compensation (maroon line), adjusts workers’ hourly earnings for inflation. During this period, hourly compensation increased by 21.4%, while consumer prices rose by 21.0%, making the average real wage in the second quarter of 2024 nearly equivalent to Q1 2020. We have posted many blogs describing the actual decline in real hourly earnings from the start of 2021 to the present, and here we see the same pattern with the more inclusive measure of real hourly compensation.
Real unit labor costs (dark blue) is the ratio of inflation-adjusted hourly compensation to labor productivity. From March 2020 to June 2024, a clear downward trend in real unit labor costs can be observed, with a decrease of 6.7% over this period. During the same timeframe, inflation-adjusted average hourly compensation rose by 0.3%, while labor productivity increased by 7.5%.
Source: Bureau Of Labor Statistics
Figure 2 depicts average hourly compensation, the consumer price index (CPI), and inflation-adjusted (or real) average hourly compensation. From Q1 2020 to Q1 2021, the CPI increased by 1.9%, while average hourly compensation grew by 7.0%, resulting in a 5.0% increase in real average compensation. Between Q1 2021 and Q2 2024, average hourly compensation continued to rise. Some of this increase has been credited to labor shortages in various industries as employers sought to increase employment after the pandemic. However, real hourly compensation did not increase, because inflation rose more rapidly than compensation. Between the first quarter of 2021 and the second quarter of 2024, average hourly compensation increased by 13.8% but prices increased by 18.8%, so that real hourly compensation declined by 4.2%.
During and after the pandemic, there was a dynamic shift in the labor market that was primarily driven by the impacts of Covid-19 and the subsequent economic recovery. While hourly compensation increased, real hourly compensation barely increased in the nonfarm business sector. Meanwhile, productivity has been growing. However, worker wages, adjusted for inflation, have not kept pace with either productivity or rising prices.