What it means
Labour productivity is output divided by hours worked. If a country makes more goods and services with the same number of hours, productivity has risen.
The release also reports hourly compensation, which includes wages and benefits, and unit labour costs, which show the labour cost of producing one unit of output. Unit labour costs go up if pay rises faster than productivity and go down if productivity rises faster than pay.
The measure matters because productivity growth is the basis of long-term gains in living standards. When workers produce more per hour, businesses can pay higher wages without raising prices, which is why economists follow the trend closely.
Unit labour costs are also watched as a signal for inflation. If they rise sharply, firms may have to raise prices to protect margins, whereas flat or falling unit labour costs suggest that pay increases are being absorbed by higher output.
The release is published periodically with figures for the whole business sector and for parts such as manufacturing, and the numbers are often revised as more data comes in. Readers should take care to compare like with like and to look at trends over several periods, since one period may be affected by one-off events.
Companies can apply the same idea internally by tracking revenue or output per employee hour and the labour cost per unit. A firm whose unit labour cost rises faster than its competitors may be at risk of losing price competitiveness.
In practice
Real-world examples.
Example
An economist notes that productivity in the business sector has risen faster than hourly pay for several periods. She concludes that unit labour costs are falling and inflation pressure from wages is low. She uses this in her forecast for interest rates. She also warns that one quarter of strong data may be revised, so she waits for a trend before changing her view.
Example
A manufacturer reviews its own figures and sees that its output per hour has risen by 4% while pay rose by 6%. Its unit labour cost therefore rose by about 2%. It decides to invest in automation to improve productivity. The finance team estimates that a $500,000 machine would pay for itself within three years through lower labour cost per unit.
Example
A trade union and an employer negotiate pay. The employer argues that raises should be tied to productivity growth. The union points to the rise in output per hour as justification for a larger increase. The two sides agree to share half of any future productivity gain as a bonus.
Formula
Calculation
Labour productivity = output / hours worked
Unit labour cost = hourly compensation / output per hour
Suppose a business pays hourly compensation of $30, and each worker produces 3 units an hour.
Unit labour cost = 30 / 3 = $10 per unit.
The next year, hourly compensation rises 10% to $33 and output per hour rises 10% to 3.3 units. Unit labour cost = 33 / 3.3 = $10 per unit, unchanged.
If instead output per hour stays at 3 units while pay rises to $33, unit labour cost = 33 / 3 = $11, which is a 10% rise.Case study
Seen in the real world.
Calder Textiles is an illustrative, fictional clothing maker that watches national productivity and cost reports to benchmark itself. Its hourly compensation was $24 and its workers produced 2 garments an hour, giving a unit labour cost of $12.
The national release showed that unit labour costs in the sector had risen by 3% while Calder's had risen by 8% after a pay deal that was not matched by output gains. The finance director calculated that, at 500,000 garments a year, the extra cost was about 500,000 x 12 x 0.05 = $300,000 compared with the sector trend.
In this illustrative story, Calder invested $400,000 in better cutting machines. Output per hour rose to 2.2 garments, which cut unit labour cost to 24 / 2.2 = about $10.91, saving roughly $1.09 per garment.
Watch out
Common mistakes.
- Reading one period's productivity figure as a trend, when it is volatile and often revised.
- Assuming a rise in productivity means people are working harder, when it can come from better machines, methods or skills.
- Comparing unit labour cost across industries without allowing for different pay levels and capital use, since a capital-intensive industry will naturally show higher output per hour.
Questions
People also ask.
What is labour productivity?
It is the amount of output produced per hour of work, usually measured for the whole business sector or a specific industry.
What are unit labour costs?
They are the labour cost of producing one unit of output, found by dividing hourly compensation by output per hour.
Why do central banks care about this release?
Because unit labour costs affect how much firms need to raise prices, so they are a signal for inflation and for interest rate decisions, alongside other data such as employment and consumer prices.
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