Largest Increase in Productivity Since 1971, at What Cost?

Productivity jumped 10.1% in the second quarter, the most since the first quarter of 1971. However, the details are more than a bit unsettling.

Productivity vs Output Disaster

Inquiring minds are diving into the BLS Productivity and Costs Report for the Second Quarter of 2020.

BLS Charts on Productivity

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Productivity Good News  and Horrible News

• Good News: The BLS notes that the 10.1-percent increase in nonfarm business sector labor productivity in the second quarter of 2020 is the largest quarterly increase since the first quarter of 1971, when output per hour increased 12.3 percent.
• Horrible News: Output decreased 37.1 percent and hours worked decreased 42.9 percent. 

Hours worked decreased more than output so productivity rose.

Hooray?

Unit Labor Costs  

• Unit labor costs in the nonfarm business sector increased at an annual rate of 9.0 percent in the second quarter of 2020, as a 20.0-percent increase in hourly compensation outpaced the 10.1-percent increase in productivity. Unit labor costs increased 9.6 percent in the first quarter of 2020, and 4.9 percent over the last four quarters.
• The 20.0-percent increase in hourly compensation in the second quarter of 2020 was the largest increase in the series which begins in 1947. Also, the labor share—defined as the percentage of current-dollar output that accrues to workers in the form of compensation—increased to 59.8 percent in the second quarter of 2020, the highest level since the fourth quarter of 2008 (60.1 percent). 

This sort of sounds like good news (assuming you are not an employer) until you understand what it means. 

Compensation reflects higher-paid employees working from home while lower-paid employees did not work many, if any hours.

Manufacturing Disaster

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In contrast to overall productivity up 10.1% manufacturing productivity dropped 14.6 percent annual rate in the second quarter of 2020, as output fell 47.0 percent and hours worked dropped 38.0 percent. 

These were the largest quarterly declines in each of these series, which begin with data for 1987.

Long Term Productivity vs Output

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Those charts put a much needed perspective on this alleged jump in productivity.