The Economy

Unit Labor Costs Surge 0.7% in Third Quarter

The increase was more than double the government's initial estimate, reflecting rising hourly wages amid low unemployment.
Matthew HellerDecember 7, 2016
Unit Labor Costs Surge 0.7% in Third Quarter

U.S. productivity in the third quarter remained unchanged from the government’s initial estimate but unit labor costs rose more than first thought.

The Labor Department on Tuesday confirmed that productivity, which measures hourly output per worker, rose at a 3.1% annual rate for the July-September period, ending three straight quarters of decline. It was the biggest gain in two years but missed economists’ expectations of a revised 3.3% increase.

Unit labor costs, a measure of the expense imposed on firms to compensate workers for their output, grew at a 0.7% rate, more than double the initial estimate of a 0.3% gain. Economists had expected the update to show a 0.2% increase.

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According to The Wall Street Journal, the growth in labor costs mainly reflected rising hourly wages and could reassure Federal Reserve officials about the economy’s health as they move closer to raising interest rates.

“The unit labor cost data add to the case for Fed tightening,” Jim O’Sullivan, chief U.S. economist at High Frequency Economics, said in a note to clients.

Amid low unemployment, companies have been competing more aggressively to retain and hire workers, pushing up wages and benefits. But, the WSJ said, “it is doubtful that wages will continue to rise at that pace in the longer term without bigger productivity gains.”

MarketWatch noted that even with the solid third-quarter gain, productivity has risen only 1% annually since 2007, compared with a 2.6% rate from 2000-07 or 2.2% going back to the end of World War II.

“Firms are not going to pay workers for productivity gains that do not exist,” Stephen Stanley, chief economist at Amherst Pierpont Securities, said in a note to clients. “So when productivity growth sags, we need to lower our sights for what constitutes an appropriate pace of wage increases.”

For the third quarter, output of goods and services was revised up to 3.6% from 3.4%, while the amount of time employees worked was also raised to 0.5% from a preliminary 0.3% reading.