US labor productivity falls, costs rise in Q1 2023.

Labor Productivity Falls and Labor Costs Rise, Posing a Challenge to the Federal Reserve

The Numbers

The first quarter of 2023 saw a decline in labor productivity by 2.7 percent in the nonfarm business sector, according to a May 4 press release by the U.S. Bureau of Labor Statistics (BLS). This is the fifth straight quarter that productivity fell on a year-over-year basis, the longest stretch of such declines since the series began in 1948. Meanwhile, unit labor costs in the nonfarm business sector increased by 6.3 percent in the first quarter of 2023, reflecting a 3.4 percent increase in hourly compensation and a 2.7 percent decrease in productivity.

In the manufacturing sector, labor productivity fell by 1.3 percent in the first quarter of 2023 while unit labor costs rose 3.4 percent during this period.

The Challenge

The Federal Reserve has been raising interest rates in an attempt to control persistent, decades-high inflation. However, higher labor costs pose a problem for the Fed. While it helps workers by ensuring they have more money to spend, rising wages can also keep pushing up prices, making it hard for inflation to get back to the Fed’s target rate of 2 percent. Annual inflation has remained at or above 5 percent for every single month since May 2021 through March 2023.

Last month, James Bullard, president of the Federal Reserve Bank of St. Louis, suggested that the Federal Reserve should keep raising interest rates as long as the labor markets remain strong. Meanwhile, the May 4 BLS report notes that while the manufacturing sector output and hours worked both grew at an annual rate of 0.3 percent since the fourth quarter of 2019, labor productivity has had “no growth since the start of the business cycle.”

Job Losses

While labor productivity dips and the Fed continues to push up rates, job losses are accelerating. According to a May 4 report by Challenger, Gray, & Christmas, U.S.-based employers announced 66,995 job cuts in April 2023, which is a 176 percent increase from April 2022. This is the fourth consecutive month this year that job cuts were higher than the corresponding month a year earlier. In the first four months of 2023, employers have already announced 337,411 layoffs, which is up 332 percent from the same period last year.

The retail industry accounted for the highest job cuts in April, announcing 14,689 layoffs. This was followed by the tech sector with 11,553 job reductions and the health care/products sector with 6,184 cuts.

More job losses might be coming in case the U.S. debt ceiling is breached, according to a May 3 report by the White House Council of Economic Advisors. Treasury Secretary Janet Yellen has already warned that the United States could default on its financial obligations as early as June 1. According to the report’s worst-case scenario, which involves the United States failing to raise its borrowing levels for over three months, around 8.3 million jobs could end up being wiped out, with the unemployment rate rising to 5 percent.

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