What continued productivity growth might say about this economy

This week features two major reports from the U.S. Department of Labor: Tuesday’s Job Openings and Labor Turnover Survey for September and Friday’s unemployment numbers for October. But there’s another less-discussed indicator set to come out in between those two on Thursday: labor productivity.

Labor productivity is the U.S. Bureau of Labor Statistics’ measure of how many goods and services the country has churned out, and how long it took to do it. Productivity growth has been strong for most of the post-pandemic period, and it continued to grow in the last quarter.

The worker output side of the equation can be measured at an economy-wide level with GDP.

“It’s one of the best measures we have,” said Courtney Shupert, an economist with MacroPolicy Perspectives.

GDP was strong in the third quarter — it rose at its fastest pace this year. Shupert said that’s a sign that consumers and businesses are doing a lot of spending, but it’s also a sign that output is strong, because the stuff that people are spending money on has to be produced by someone.

“And so when we’re measuring expenditures, we’re also measuring how much of it has been produced,” Shupert said.

Then, there’s how many hours people worked — how long it’s taking everyone to produce all this stuff. Matthew Martin, senior U.S. economist with Oxford Economics, said that hiring has been relatively weak this year.

“[So,] what we’re seeing is growth in the labor force is quite slow at the moment,” Martin said. “And so because of that, the aggregate hours worked is actually slowing down compared to what we’ve seen in prior years.”

In other words, people are producing more stuff, and at least on average, they’re not working longer hours to do it.

“So, when you add those two together, that really does point to stronger productivity,” Martin said.

Higher productivity is welcome news for the economy overall. Nicole Cervi, an economist with Wells Fargo, said that strong productivity growth can raise standards of living.

“Because that is correlated with stronger real income growth for consumers,” she said. “We’re producing more things, we’re consuming more things, and that translates to higher wages at the end of the day.”

But wages aren’t rising that much. They’re certainly not keeping up with inflation.

“You can have this situation where output growth looks robust, productivity’s robust, but who’s really benefiting from it?” Cervi said. “[It] doesn’t really look like the worker is at this point in time.”

One reason is that there’s not a lot of churn in the economy right now: workers are sticking with their jobs, and layoffs are low. Cervi said that those factors could be holding back wage growth and productivity.

“When you’re looking to switch a job, right, usually what you’re doing is you’re trying to find either higher wages or a better fit for your skills,” she said. “Sometimes — a lot of times — those things are aligned.”

So, even though productivity growth is strong, it could be even stronger if more people were on the market for jobs they’re better suited for.