Productivity surge lowers unit labor costs despite wage rise

Nonfarm business unit labor costs fell 0.7% at an annualized rate in the third quarter, the Bureau of Labor Statistics reported November 5. Productivity growth outpaced hourly compensation, allowing businesses to increase output per hour without proportional labor cost increases.

Productivity Outpaces Wage Growth

BLS preliminary data showed nonfarm business productivity rose 3.6% in the third quarter. Total output increased 3.7%, while hours worked grew only 0.1%. Hourly compensation rose 2.9%. All figures are seasonally adjusted annualized rates.

Unit labor costs are derived by dividing hourly compensation by productivity. When output per hour rises, businesses can pay higher wages without increasing the cost per unit of production. Consequently, rising wages do not automatically raise unit labor costs if productivity grows faster.

Implications for Inflation and Rates

Despite the quarterly dip, nonfarm business unit labor costs were 2.4% higher than a year prior. This complicates the November 6 employment report, which saw October payrolls rise by 165,000—surpassing the 12-month monthly average of 48,000. Average hourly earnings for private nonfarm employees rose 0.4% monthly and 3.1% annually.

Third-quarter productivity does not define October levels, nor can annualized rates be subtracted from monthly earnings. Higher hiring and pay alone do not dictate labor costs per unit, leaving sustained inflation pressure unresolved.

On October 28, the Federal Open Market Committee kept its target range at 3.75% to 4.00%. The 10-2 vote saw Lisa Cook and Beth Hammack favor a quarter-point increase. The FOMC noted strong productivity alongside elevated inflation, limiting the argument that productivity gains automatically signal a shift toward easier monetary policy.

Bitcoin price relief depends on interest rate expectations. A sustained drop in inflation pressure could lower expected short-term rates and funding costs. Conversely, persistent inflation or higher labor costs would pressure risk assets via higher financing costs.