U.S. productivity growth slows as unit labor costs accelerate

U.S. labor productivity growth slowed in the fourth quarter of 2024 while unit labor costs accelerated, according to preliminary figures released by the Labor Department on February 6, 2025. The report showed businesses producing more per hour worked, but at a weaker pace than in the preceding quarter.

Nonfarm business productivity increased at a seasonally adjusted annualized rate of 1.2%, down from a revised 2.3% in the third quarter. The result was below the 1.4% increase economists surveyed by The Wall Street Journal had expected, MarketWatch reported. Output rose at a 2.3% rate, while hours worked increased 1%.

Unit labor costs climbed at a 3% annualized rate, accelerating from a revised 0.5% in the third quarter. Hourly compensation increased 4.2%, outpacing the productivity gain. The Bureau of Labor Statistics calculates unit labor costs by comparing compensation per hour with output per hour, capturing how much labor expense is associated with each unit produced.

That relationship matters because improved productivity can offset higher compensation costs. When efficiency gains slow, rising pay puts more upward pressure on labor costs per unit of output. The bureau describes the measure as an indicator of inflationary pressure on producers, rather than a direct reading of changes in consumer prices.

The year-over-year figures offered a separate perspective on the quarterly movements. Productivity was 1.6% higher than in the fourth quarter of 2023, while unit labor costs increased 2.7% over the same period. Inflation-adjusted hourly compensation rose 1.1% at an annualized rate during the quarter and was 1.5% above its year-earlier level.

Despite the late-year slowdown, annual average productivity growth strengthened to 2.3% in 2024 from 1.6% in 2023. For the full year, output increased 2.9% and hours worked rose 0.6%. Unit labor costs increased 2.6%, reflecting hourly compensation growth of 5% partly offset by improved productivity.

The longer-term comparison was mixed. From the fourth quarter of 2019 through the end of 2024, nonfarm business productivity grew at an annualized rate of 1.8%, according to the bureau. That exceeded the 1.5% pace of the preceding business cycle but remained below the long-term rate of 2.1% recorded since the first quarter of 1947.

Manufacturing showed a different pattern: productivity increased at a 0.8% annualized rate in the fourth quarter as hours worked fell faster than output. Manufacturing output declined 1%, while hours decreased 1.8%. Unit labor costs in the sector increased 3.3%, with hourly compensation rising faster than productivity.

The February release was preliminary, leaving the estimates subject to revision as additional information became available. The bureau scheduled an updated report for March 6, 2025, and said it would incorporate the annual benchmark revision to payroll survey data. Those revisions were the next scheduled opportunity to reassess the balance between output, working hours and compensation.