# Productivity & Costs for Q2 2012

The Q2 2012 Productivity & Costs report shows Labor productivity increased +1.6% from Q1 2012, annualized. Output increased +2.0% and hours worked increased +0.4%. This report shows more bad news for workers, more output for less hours means worker squeeze and less hires. Graphed below is business, nonfarm labor productivity per quarter.

The basic equation for labor productivity is $\frac{Q}L$, where $Q$ is the total output of industry.

How does the BLS calculate labor productivity?

Labor productivity is calculated by dividing an index of real output by an index of the combined hours worked of all persons, including employees, proprietors, and unpaid family workers.

$L$, or Labor, is measured in hours only. Both values are normalized to a base year, 2005. Business Output directly correlates to real GDP, minus the government, all of those nonprofits and our infamous, often illegal nannies and gardeners, and equivalent rent of owner occupied properties. The output, or $Q$ is about 75% of real GDP reported. Farms, if you can believe this, only subtract off about 1% from output totals. Labor productivity is reported annualized. The main productivity numbers above are all business, no farms. This does include the manufacturing sector.

From Q2 2011, or a year ago, annual productivity increased +1.1%, output +2.9% and hours +1.8%. Changes from a year ago show a little less worker squeeze for increased output than the annualized change from the last quarter. Output only growing 2.9% from a year ago shows an anemic economy as well.

BLS defines unit labor costs as the ratio of hourly compensation, $C$, to labor productivity,$L$, or $\frac{\frac{C}L}{\frac{Q}L} = \frac{C}{Q}$. For more formula definitions see the BLS handbook. From the report is the relationship of the ratios:

BLS defines unit labor costs as the ratio of hourly compensation to labor productivity; increases in hourly compensation tend to increase unit labor costs and increases in output per hour tend to reduce them. Real hourly compensation is equal to hourly compensation divided by the consumer price series.

Graphed below are unit labor costs, compounded annual rate, percent change. Annualized unit labor costs increased +1.7% for Q2 2012, although from a year ago, Q2 2011, labor costs are are up only 0.8%. Increases in unit labor costs are due to mo' money, increased compensation for the same output. Increased productivity for the same  paid to workers would show lower unit labor costs.

Graphed below are unit labor costs, indexed to 2005. Notice the decline starting in the Great Recession. This Q2 2012 increase in unit labor costs is slightly better news for workers' pockets.

Real hourly compensation is wages adjusted for inflation. Real hourly compensation is equal to hourly compensation divided by the consumer price series, or $\frac{C}{P}$.

The consumer price series, $P$, increased at a 0.8% annual rate for Q2, which is a fairly low rate of inflation. By comparison's sake CPI also increased 0.8% annualized for Q2. In terms of real dollars, adjusted for inflation, we have an annualized +2.6% increase in real hourly compensation for Q2 2012, non-farm businesses, and a flat-line zero percent change in comparison to Q2 2011. This is a little better than previous reports, but still shows wages are barely keeping up with inflation overall. Below are quarterly changes to hourly compensation, adjusted for consumer prices. You can see the rise and fall with deflation and inflation.

The BLS productivity statisticians use CPI-U-RS up to Q1 2012 and then for the current quarter, re-adjust CPI-U, but indexed to 2005. First, the CPI-U-RS is a research measure. This consumer price series seems to flatten inflation, thus make the decline in U.S. wages less, although when normalized to a base year of 2005 the two series are the same for all practical purposes for over a decade. The implicit price deflator, applied to nonfarm business output (productivity), is from the BEA. CPS and the price deflator are all to remove inflation effects from the productivity statistics.

The BLS also reports separately on manufacturing productivity, but uses a different calculation method than the one for business productivity. So, don't think ya can subtract the below and get services productivity, the two ain't the same.

Manufacturing is sales, removing duplicates, adjusting for prices and output ($Q$) is correlated to shipments and the industrial production. indexes. Hours are hours like above. Page 4 of the report has the manufacturing productivity measurement nitty gritty.

Manufacturing productivity increased, annualized, 0.2% in Q2 2012. Manufacturing output increased 1.7% while hours worked increased 1.4%. Since Q2 2011, productivity increased 2.9%, output increased 5.6% and hours rose 2.6%.

Manufacturing unit labor costs are up 0.3% for Q2 2012, at annual rates, yet from a year ago are down -2.9%.

Real compensation (wages) in manufacturing decreased -0.3% for Q2 2012, even though compensation per hour, not adjusted for inflation was 0.5%. Manufacturing workers are getting squeezed!

Since Q2 2011, real hourly compensation has dropped -1.9% with compensation per hour, not adjusted for prices, dropping -0.1%.

Manufacturing wages are beyond not keeping up with inflation, the numbers look like plain labor arbitrage. Below is real hourly compensation for all manufacturing.

The productivity gains for manufacturing were all durable goods. For Q2 2012, durable good manufacturing productivity grew at 4.3%, output increased 6.2% and hours increased 1.9%. Yet none of this translated to workers. Durable goods labor unit costs dropped -4.9% and real compensation declined -1.5%! It's unbelievable, actual hourly wages dropped -0.8%. That's straight hourly wages, being paid to durable goods manufacturing workers. All of these figures are the change from Q1 2012 and are presented as annualized rates. Below is the durable goods manufacturing real hourly compensation index. Note it's decline.

Unit labor costs in durable goods shows the decline of the American worker for they are returning to their record lows. Unit labor costs show real output per hour. Durable goods workers are producing more and more and U.S. workers are getting less reward.

What you see these days in productivity is not what it appears. The press will claim increased productivity is a great thing, and maybe that's true for corporate profits, but it's clearly not translating into wages and jobs for workers.

While leads me to this paper from the Monthly Labor Review, The compensation-productivity gap: a visual essay. Now these are the people who maintain the BLS productivity statistics. In the report, they go over their methods, calculations, which can make a huge difference in results. Bottom line they show since the 1970's, workers are getting less and less of the labor share or payout, less of a slice from the American pie called increased economic output. What they found was most of the productivity vs. how much you get in your pocket to spend gap before year 2000 could be attributed to a couple of different measures for inflation. After 2000, the gap is because workers are getting screwed.

From the paper:

Labor share is a measure of how much of the economic pie goes to all workers. When labor share is constant or rising, workers benefit from economic growth. When labor share falls, the compensation–productivity gap widens. Concurrently, nonlabor costs—which include intermediate inputs into production and returns to investments, or profits—represent a greater share of output.

Below is labor market share for nonfarm business which shows workers overall are getting less and less of the productivity pie.

Their paper is loaded with graphs, but the above was reprinted for it shows clearly, since 2000, American workers are simply getting shafted while those making the profits are taking it to the bank.

Productivity and Costs was significantly revised. It's tied to GDP, which is revised heavily, with benchmarks, as well as other inputs which are revised. Here is last quarter's overview, unrevised, but the graphs are.