US Labor Productivity Suffers Biggest Drop on Record in the Second Quarter of 2022

By Bryan Jung
Bryan Jung
Bryan Jung
Bryan S. Jung is a native and resident of New York City with a background in politics and the legal industry. He graduated from Binghamton University.
August 9, 2022 Updated: August 9, 2022

U.S. non-farm labor productivity sank 4.6 percent, at a seasonally adjusted annual rate, in the second quarter of 2022, 3 percent below the decline in the previous quarter, according to a U.S. Bureau of Labor Statistics report on Aug. 9.

U.S. non-farm business output, which is about 75 percent of U.S. gross domestic product (GDP), decreased by 2.1 percent during the second quarter, while hours worked increased by 2.6 percent, at half the pace of the previous quarter.

This is a sign that the American economy, as measured by GDP, has shrunk for a second consecutive quarter.

Inflation, which reached a 40-year high, has been hitting consumer spending, while interest rate hikes by the Federal Reserve, in order to control rising costs, have curtailed business growth and housing sales.

The 4.6 percent drop in the second quarter, which does not include farm-related work or the public sector, is less than the 7.6 percent contraction in the first quarter and slightly below economists’ forecast of a 4.5 percent decline.

The decline in labor productivity from March through June is also below earlier estimates, for a 9.3 percent rise in labor costs.

Total worker productivity tumbled significantly over the past year, even though the economy rapidly added workers, while its output grew slowly, in the largest decline ever recorded, going back to the first quarter of 1948.

The decline over the past two quarters has reduced the average annual productivity growth rate since the fourth quarter of 2019, which was the last quarter not affected by the pandemic, to 0.6 percent in the nonfarm business sector.

The most declines came in the services sector, which is still recovering from the pandemic.

Labor Costs and Wages

Productivity in the business sector fell 2.5 percent from a year ago, due to a 1.5 increase in economic output, while there has been a 4.1 percent increase in total hours worked.

Hourly compensation rose 5.7 percent in the second quarter of 2022, but fell from the 6.7 percent rate in the same period last year.

Unit labor costs rose 10.8 percent in the second quarter of 2022, with results lower than the first, when costs rose by 12.6 percent.

This measure is the ratio of hourly compensation to labor productivity and the biggest expense for many businesses.

An increase in hourly compensation rates generally leads to increased unit labor costs, while a rise in productivity tends to reduce them.

Labor costs increased by 9.5 percent over the last four quarters, in the largest yearly increase recorded since the first quarter of 1982, when it rose by 0.6 percent.

The pandemic and subsequent recovery over the past two years has made often volatile productivity growth rate figures even more prone to big fluctuations, affecting the Fed’s response to inflation.

The Fed has blamed post-pandemic changes to the American workforce for making it harder to estimate underlying productivity growth, which has taken a hit since 2020.

Rising labor costs have surpassed the central bank’s inflation goal by nearly five times on an annual basis, placing upward pressure on consumer prices and, in the end, making its attempts to inflation fight more difficult, according to Reade Pickert of Bloomberg Economics.

Manufacturing sector labor productivity rose 5.5 percent in the second quarter of 2022, with a 4.3 percent increase in output and a 1.1 percent decline in hours worked.

Total productivity by increased 0.4 percent from the same period in 2021, and is 4.9 percent higher than in the fourth quarter of 2019.

This corresponds to an annual labor productivity growth rate of 1.9 percent during that period.

The sector’s labor output rose 3.6 percent above its pre-pandemic level, but hours worked remain 1.3 percent below the last quarter of 2019.

Unit labor costs for the second quarter of 2022 in the total manufacturing sector fell 0.5 percent, while hourly compensation rose 4.9 percent, although a year ago it was up 4.4 percent.

There were 10.7 million job openings at the end of June, according to the last official estimate, with the unemployment rate falling back to its pre-pandemic level of 3.5 percent, now at a five-decade low.

Job openings, according to government statistics, outnumber the unemployed by nearly two to one, as competition for workers has fueled a jump in wages in certain sectors; however, many Americans are working in more than one job to make ends meet.

Hourly compensation had risen in the last quarter, but it declined by 4.4 percent on an inflation-adjusted basis.

July’s highly awaited gauge of consumer price inflation is to be released on Aug. 10 and is expected to show a general decline in costs for that month, due to falling energy prices.

However, the annual inflation rate, with food and energy costs excluded, is thought to have risen, a sign that price pressures are still having a negative impact on the economy.

Reuters has contributed to this report.

Bryan Jung
Bryan S. Jung is a native and resident of New York City with a background in politics and the legal industry. He graduated from Binghamton University.