Looking Beyond a Weak Jobs Report: A View on Productivity and Labor Costs

by: Max Fraad Wolff

November non-farm payrolls increased by 39,000 jobs and the unemployment rate increased to 9.8%. Job growth came in well below expectations and the ranks of the unemployed increased by 276,000. Also, 59% of the unemployed have been out of work for 15 weeks or longer and 41.9% of our unemployed have been out of work for 27 weeks or longer. This highlights coming issues if extended unemployment insurance benefits are not worked out in Congress.

Government employment continued to fall in November 2010. Total employment at all levels of government declined by 11,000 jobs led by local governments that reduced payrolls by 14,000 net jobs. Average weekly earnings fell by $2 from October through November 2010, from $644.78 to $642.87.

This was a very weak jobs report and highlights the continued economic pain that confronts job seekers, job holders and Americans broadly. This report also strongly suggests that focus and priority in Washington must be on employment and wage growth. This report further suggests that letting unemployment insurance extension fall by the wayside risks real trouble for the holiday season, millions of families and communities.
There is much importance in the payroll reports. Productivity and labor costs tend to be the neglected step child in the Bureau of Labor Statistics (BLS) reports. On Dec. 1, 2010, we got further confirmation of a now long-standing and interesting trend. American labor productivity is rising. The output produced by workers is rising. The output produced by labor has risen faster and further than very modest increases in the costs of labor. This has resulted in falling unit labor costs.
Retail employment provides an example of divergence. We saw a November decline of 28,000 jobs with 9,000 total jobs reduction in department store employment. This comes despite a rise in consumer spending and initial reports of a very strong Black Friday weekend sales report.
Unit labor costs in non-farm businesses decreased 0.1% in the third quarter of 2010, because productivity grew 2.3% while hourly compensation increased 2.2%. Over the last four quarters, unit labor costs declined 1.1%. 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 average hourly earnings have increased by .5% between October 2009 and October 2010, according to BLS data. This offers some insight into the difficulties, political and economic, that we see. Profits are rising and national economic numbers have improved. However, millions face a very weak labor market and frustrating trends in wages. We are seeing record profits as a percentage of GDP and relative to wages. To achieve broad economic progress and address rising needs for budget balance we need wages and employment to outgrow GDP. This is required to return the consumer and government balance sheets to health. Without this it is very unlikely we can continue to see strong earnings growth.
Disclosure: None.