Labor Productivity

In the third quarter, labor productivity grew at an annual rate of 5.2 percent, far above the long-term average of 1.6 to 1.9 percent. This second consecutive quarter of above-average growth is encouraging. Further, labor productivity growth calculated for the total economy shows an even better picture.

The Bureau of Labor Statistics report annualized nonfarm business labor productivity growth of 5.2 percent in the third quarter of 2023, following 3.4 percent in the second quarter. While these quarterly growth figures can be noisy, the last two quarters have been encouraging.

As Jason Furman points out, from 2018 until COVID annualized productivity growth was 1.8 percent, and from 2019 onward growth is 1.5 percent, which suggests that we are now catching up to the pre-COVID trend. These calculations, however, are sensitive to the reference dates. For example, the pre-COVID trend measured from 2014 to 2019 Q4 is 1.6 percent productivity growth.

Additionally, while the official measure of labor productivity is based on nonfarm businesses, we can estimate total economy labor productivity, including everything in GDP. Specifically, total economy labor productivity is real GDP divided by total hours worked by US households, calculated from the Current Population Survey microdata.

The following chart combines nonfarm business labor productivity (blue) with total economy labor productivity (orange), and includes growth projections based on the 2014 to 2019 Q4 period. While nonfarm business labor productivity growth usually outpaces growth in the total economy measure, the cumulative growth of the two is virtually identical from 2018 to 2023 Q3. The total economy measure is currently well above its pre-COVID trend.

For context, over the longer-term, since 1989, nonfarm business labor productivity has grown at an annual rate of 1.9 percent, while total economy productivity has grown at a rate of 1.5 percent. More recently, growth has been slower; from 2014 to 2019 Q4, nonfarm business sector growth is 1.6 percent and total economy growth is a meager 1.0 percent. These 2014 to 2019 growth rates are projected forward as the dashed lines in the chart above.

For the nonfarm business sector, actual labor productivity growth since COVID has nearly caught up to the pre-COVID trend, with annual growth of 1.5 percent since 2019 Q4. Meanwhile, total economy labor productivity has grown by 2.0 percent per year since 2019 Q4, double the pre-COVID trend and well above the long-term average growth rate.

The increase in total economy labor productivity, especially in contrast to the nonfarm business sector, is an intriguing trend. Two factors seem to drive the result: 1) nearly all of the substantial net job growth since COVID is in nonfarm businesses, 2) the average workweek reported in the household survey has fallen behind the average workweek reported by businesses. I’d like to keep an eye on this trend and perhaps dig into it a bit more in the future.