Productivity Growth
Productivity growth measures the increase in output produced per unit of input — most commonly labor hours — over time, and is published quarterly by the Bureau of Labor Statistics as the cornerstone of long-run improvement in living standards.
The BLS Productivity and Costs report is released quarterly, approximately five weeks after the end of each quarter, and covers nonfarm business productivity, which measures real output per hour of all persons engaged in production. It is accompanied by data on unit labor costs, hourly compensation, and real hourly compensation. Revisions can be significant as underlying output and hours data are refined.
Productivity growth is the engine of long-run economic prosperity. When workers produce more output per hour worked, businesses can pay higher wages without raising prices, government revenues grow without requiring tax rate increases, and the overall standard of living rises. The rapid productivity growth of the 1990s, often attributed to the diffusion of information technology, helped sustain a combination of strong growth, low unemployment, and subdued inflation that was unusually favorable for financial assets.
In contrast, a period of weak productivity growth — which characterized the U.S. economy from roughly 2005 through the late 2010s — makes the trade-off between growth and inflation more difficult. The same level of wage growth becomes more inflationary when productivity is stagnant because labor costs per unit of output rise. This is the concept of unit labor cost, which the Fed monitors closely.
The post-pandemic era has sparked debate about whether artificial intelligence and related technologies might generate a new productivity acceleration. Early signals from BLS data through 2023 and 2024 were mixed, but technology optimists argue that a productivity surge could allow the economy to grow faster with less inflation — a scenario that would be broadly positive for corporate earnings and equity markets.
For investors, productivity trends affect profit margins across the economy. When productivity grows faster than wages, corporate margins expand. When wages outpace productivity — as they did during the 2021-2023 inflation surge — margins compress unless companies can raise prices sufficiently to offset higher unit labor costs.