U.S. Labor Productivity Sees Steepest Decline in 40 Years

November 4, 2021

US labor market productivity fell dramatically in the third quarter, dropping to its lowest level in 40 years.

Productivity fell at a seasonally adjusted annual rate of 5% in the period between July and September, according to the Bureau of Labor Statistics. That is the sharpest decline since 1981, when the country was in the midst of a recession.

While this sounds alarming, economists have been quick to attribute the decline to a confluence of factors that also derailed the economic recovery over the summer, and it is unlikely to be the start of a trend. The spread of the highly contagious Delta variant hitting at the same time as supply-chain disruptions were becoming a full-blown crisis severely held back production. It is also not uncommon for productivity to slow following a period of rapid acceleration, which we saw in the earlier part of the year.

 The quarter also saw a big increase in labor costs, which could further fuel inflationary pressure. Unit labor costs jumped by an annual rate of 8.3% in the third quarter, according to the Bureau of Labor Statistics.

Falling productivity and climbing labor costs, coupled with higher prices for raw materials and shipping, may leave companies with little choice but to pass their additional costs onto consumers, driving up inflation.

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