Use labor productivity to drive down purchase costs

 Suppliers often use wage increases to justify nudging up prices each year, usually 1 to 3%. And it’s hard to argue: – seems reasonable, and it’s less than inflation.
But wages aren’t the real issue – labor costs are.

And the reality is that the average cost of a ‘unit of labor‘ has risen very little, over the last 5 years – only about 1/2% per year.

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US Labor Costs rise sharply in Q4

Labor costs rose at a 4.5 percent rate in the fourth quarter 0f 2012, the fastest gain since the first quarter of 2012. However, for all of 2012, labor costs were up a modest 0.7 percent. That compared to a gain of 2 percent in 2011 and a decline of 1 percent in 2010.

Labor costs were rising more rapidly before the Great Recession, which triggered millions of layoffs and reduced workers’ bargaining power.

The main reason for the increase in Labor Costs was a fall in productivity. U.S. worker productivity shrank in the final three months of 2012 although the decline was caused by temporary factors.

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Worker productivity slows as labor costs rise in the final months of 2011

Labor costs increased at a 2.8 percent rate in the fourth quarter. That’s lower than the 3.9 percent rise in the third quarter, but much higher than the initial fourth-quarter estimate of 1.2%.

Growth in U.S. worker productivity slowed at the end of last year, while labor costs rose. Fewer gains in worker output suggests employers must add workers if they want to meet higher demand.

The Labor Department said Wednesday that productivity rose at an annual rate of 0.9 percent in the October-December quarter. While that’s a slight upward revision from last month’s preliminary estimate, it’s half the pace from the July-September quarter.

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America’s Productivity Boom

Of the 19 economies tracked by the BLS, only Taiwan managed to improve its unit labor cost position more than the United States did.

U.S. workers can be placed at a competitive disadvantage because of low labor costs abroad. This disadvantage was especially severe in the early years of the 2000s when the enduring effects of earlier financial crises in many parts of the world depressed production costs in much of Asia, Brazil, Russia, and elsewhere. Since then, continued robust productivity growth in the United States, particularly in the manufacturing sector, has been reinforced by a gradual realignment of the currencies of many U.S. trading partners.

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Worker Productivity Rises, Labor Costs Fall

Labor costs dropped at an annual rate of 2.4 percent in the third quarter, the first decline since late 2010.
U.S. workers increased their productivity this summer by the largest amount in a year and half, and they cost their employers less. The trend is good for corporate profits but not necessarily for job growth.

The Labor Department says productivity rose at an annual rate of 3.1 percent in the July-September quarter after two straight quarterly declines. Labor costs dropped at an annual rate of 2.4 percent in the third quarter, the first decline since late 2010.

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U.S. Productivity Rises 2.6% in Fourth Quarter, Costs Fall (1) – Bloomberg.com

For all of 2010, productivity climbed 3.9 percent, the most since 2002. Labor costs fell 1.5 percent after a 1.6 percent decrease in 2009. It was the first back-to-back drop since 1962- 63, the Labor Department said.

March 3 (Bloomberg) — The productivity of U.S. workers increased in the fourth quarter at a faster pace as companies sought to pare costs to preserve profits.

The measure of employee output per hour rose at an unrevised 2.6 percent annual rate after a third-quarter gain of 2.3 percent, figures from the Labor Department showed today in Washington. Labor expenses fell for a second straight year.

Increased demand may prompt companies such as Intel Corp. to ramp up hiring as they bump up against efficiency limits with their current labor force. Declines in labor expenses help keep inflation contained amid rising commodity prices, giving the Federal Reserve scope to complete its unconventional easing program through June.

“Businesses have consistently surprised on the upside by squeezing out productivity gains,” Sal Guatieri, a senior economist at BMO Capital Markets in Toronto, said before the report. “We’re hoping some of the pickup in demand will translate into stronger job growth, perhaps at the cost of slippage in productivity.”

via U.S. Productivity Rises 2.6% in Fourth Quarter, Costs Fall (1) – Bloomberg.com.

U.S. productivity rises 2.6% in fourth quarter Economic Report – MarketWatch

For all of 2010, U.S. productivity grew at a 3.6% annualized rate — the fastest increase in eight years.

The unit cost of labor, meanwhile, fell at a 0.6% rate in the fourth quarter. Unit-labor costs reflect how much it costs a business to produce one unit of output, such as a ton of steel.

Unit labor costs, which have fallen in five of the past six quarters, are 0.2% lower compared to one year ago.

via U.S. productivity rises 2.6% in fourth quarter Economic Report – MarketWatch.

U.S. Manufacturing Productivity Strong in 2009 – Real Time Economics – WSJ

The U.S. had the sharpest increase in manufacturing productivity — output per hour of work — in 2009 of the 19 industrialized economies for which the U.S. Bureau of Labor Statistics keeps data: 7.7%.

via U.S. Manufacturing Productivity Strong in 2009 – Real Time Economics – WSJ.

Productivity falls while labor costs increase

Productivity in the spring fell by the largest amount in nearly four years while labor costs rose, signals that companies may have reached the limits of squeezing more work out of fewer workers.

Productivity dropped at an annual rate of 1.8 percent in the April–to–June quarter, double the 0.9 percent decline originally reported a month ago, the Labor Department said Thursday. Unit labor costs rose 1.1 percent, the biggest rise in labor costs since late 2008.

via Productivity falls while labor costs increase.