Long Term Perspective

While accelerating wage gains could lead to consumer price increases, it is important to look at the link in between -- productivity. Productivity gains allow wages to increase without generating inflationary pressures. Note how sharp productivity increases since 1996 were associated with only modest gains in unit labor costs. The previous recovery (post-2001) had low job gains ("the jobless recovery") partly due to the sharp productivity gains between 2002 and 2004. Productivity gains were more moderate in 2005 but fell in 2006 and remained low in the first half of 2007 before turning up late in the year through early 2010. While productivity growth is a good long-term factor for economic prosperity, it is not helpful to the labor market in the short run when fewer workers are necessary to get the job done.  The current recovery initially had been a jobless recovery for the most part with persistent job gains starting only in early 2010 (at least for the private sector).

 

Unit labor costs are also important for Fed officials. They tend to run inversely to productivity. That is, when productivity increases, unit labor costs decline and vice versa.

 

 

Short Term Perspective

Nonfarm business productivity in the third quarter of 2014 gained an annualized 2.0 percent, following an increase of 2.9 percent in the second quarter.  The third quarter eased after a second quarter weather-related rebound.  Unit labor costs rose 0.3 percent in the third quarter after slipping 0.5 percent the prior period.

 

Year-on-year, productivity was up 0.9 percent in the third quarter versus 1.3 percent the quarter before.  Year-ago unit labor costs were up 2.4 percent, compared to up 1.5 percent in the second quarter.