Productivity and Costs (Measure of Changes in Worker Efficiency) Web address: Revisions can be substantial Productivity – output of goods/services per labor hour. Measures how firms are using their employees and physical capital (land, materials, equipment). Most important determinant of economy’s long-term health and prosperity. Higher productivity keeps inflation,  P/P, in check. Track non-farm business sector productivity for best reading on Y. (75% of GDP) Productivity Growth and a Virtuous Cycle:  productivity (Y/L) =>  economic growth (  Y/Y) without inflation (  P/P). Falling ULC =>  exports (X),  household wages/income,  corporate profits,  dividends, =>  business investment spending, =>  (Y/L) The Business Cycle and Productivity Swings (cyclical productivity growth, %  (Y/L)) Economic slowdown:  spending =>  production (Y) =>  (Y/L) Recession:  labor (L) =>  (Y/L) Recovery:  production (Y) =>  (Y/L) Expansion:  labor (L) =>  (Y/L) The Productivity/Unemployment Relationship:  (Y/L) =>  profits =>  Investments => new business =>  employment 3 Major Components: %  W = %  (Y/L) + %  (WL)Y 1. Output Per Hour (Y/L): Productivity measures labor efficiency. Labor productivity is a leading indicator of inflation (  P/P). Productivity growth helps determine economic speed limit. Maximum sustainable economic growth rate = productivity growth + labor force growth 2. Compensation Per Hour (W): average hourly compensation rate. Provides clues on emerging wage pressures. Compensation = wages, salaries, bonuses, commissions, value of employment paid benefits (health costs, social security funds, private pensions). Compare compensation growth to productivity growth. 3. Unit Labor Costs (WL/Y): Labor costs to produce a single unit of output. Excellent indicator of business labor costs. Link between compensation per hour and output per hour. W = Y/L x (WL)/Y. Labor costs equal 2/3 of all business expenses. Close statistical relationship between ULC and CPI.  ULC =>  P/P and  profits.  = PY –WL.   Y = P –  (WL)/Y If productivity growth > compensation growth =>  ULC =>  profits,  inflation,  wages,  stock prices,  living standards If compensation growth > productivity growth =>  ULC =>   P/P Market Analysis: Bonds:  %  (Y/L) and  W/W =>  (  P/P) E t+1 =>  D Bonds =>  i Bonds Stocks:  (Y/L) =>  (WL)/Y, (ULC) =>  profits =>  P Stocks Dollar:  Y/L =>  U.S. global competitive position =>  [  P/P U.S. /  P/P ROW] =>  X,  M =>  dollar

4th Quarter 2011 (SAAR) 1.9% = 1.2% Wages = Labor Costs per Output + Output per Hour

 = PY – wL Productivity = Y/L  Y/L =>    P =>   Wage Growth Rate Analysis  W/W = %  (Y/L) + (  P/P) , U.R. > 5% 4% = 4% + 0% Wage growth compensated for productivity but not the 2.2% inflation , U.R. < 5% 4.5% = 2.5% + 2% Wage growth compensated for productivity, and part of 3.5% inflation