Annual Labor Productivity Saw Biggest Drop in 49 Years in 2022

Workers exit the Marathon Galveston Bay Refinery in Texas City, Texas, on May 10, 2022. (Brandon Bell/Getty Images)

U.S. worker productivity saw its largest annual decline in 2022 in nearly five decades, despite an improvement in the fourth quarter.

Nonfarm labor productivity, which measures hourly output per worker, fell 1.5 percent in the fourth quarter from the year-ago period, the Department of Labor reported on Feb. 2.

Total worker productivity for 2022, in general, fell 1.3 percent from 2021, the biggest annual decline since 1974, when productivity on average fell 1.7 percent.

Last year was volatile, with productivity falling by 0.4 percent on an annual basis in the first quarter, tumbling again, to 2.1 percent in the second quarter, and down 1.1 percent in the third quarter.

However, productivity in the final quarter rose at a seasonally adjusted and annualized rate of 3 percent, exceeding economists’ expected growth rate of 2.4 percent. Compared to the third quarter, productivity rose at a 1.4 percent annualized rate, which was upwardly revised from the previous estimate of 0.8 percent.

The gains in the third and fourth quarters were preceded by a 5.9 percent drop in the first quarter, which was the worst since the spring of 1960. This was followed by a 4.1 percent drop in the second, which saw the worst results since a 4.1 percent drop in productivity in 1990.

Labor Costs Continue To Rise

Unit labor costs, which compares worker compensation with productivity, rose at a 1.1 percent annualized pace in the fourth quarter, after growing 2 percent in the previous quarter.

On an annual basis, unit labor costs increased 4.5 percent from the year before, surging 5.7 percent in 2022, which twice the rate desired by the Federal Reserve to meet its 2 percent inflation target.

“The labor market continues to be out of balance,” said Fed Chairman Jerome Powell on Feb. 1, noting that the unemployment rate would need to rise from its current level of 3.5 percent to reach that 2 percent mark.

Hourly compensation increased at a 4.1 percent pace in the last quarter from a 3.4 percent growth rate in the third quarter.

Compensation grew at a 3.0 percent rate compared to the fourth quarter of 2021 and rose 4.4 percent in 2022.

Fed to Persist With Interest-Rate Hike Strategy

Meanwhile, the Fed raised its policy rate by 25 basis points on Feb. 1, to a range of 4.50–4.75 percent, as central bank policymakers promised “ongoing increases” in borrowing costs.

Fed officials said that although they believe the economy had turned a corner in the fight against high inflation, they would continue to raise the benchmark overnight interest rate through 2023, before proclaiming a victory.

“We can now say for the first time that the disinflationary process has started,” Powell told reporters.

Powell said that the slowdown in the price of goods and the easing of pandemic-related shortages and supply-chain logjams were “a good thing.”

Reuters contributed to this report.