U.S. productivity slows in fourth quarter as labor costs accelerate

U.S. labor productivity growth slowed in the fourth quarter of 2024 while labor costs per unit of output accelerated, according to preliminary Labor Department figures released Feb. 6, 2025. The report showed businesses gaining less additional output per hour as hourly compensation growth picked up.

Nonfarm business productivity increased at a seasonally adjusted annual rate of 1.2%, down from a revised 2.3% in the third quarter. The result fell short of the 1.4% increase economists surveyed by The Wall Street Journal had expected, MarketWatch reported.

Unit labor costs rose at a 3% annualized rate, compared with a revised 0.5% increase in the previous quarter. Hourly compensation increased 4.2%, outpacing productivity and pushing up the labor expense associated with each unit of production.

Productivity measures the amount of inflation-adjusted output produced for each hour worked, rather than total production alone. A slowdown in productivity growth therefore does not necessarily mean businesses are producing less; it means output per hour is improving more slowly.

The distinction matters because productivity gains can help companies accommodate higher compensation without an equivalent increase in production costs. As the Bureau of Labor Statistics explains, stronger output per hour offsets some of the cost pressure from rising hourly pay and benefits.

Unit labor costs capture that relationship by comparing hourly compensation with productivity. They are an indicator of pressure on producers, not a direct measure of consumer inflation, and an increase does not by itself establish how much businesses will raise selling prices.

The full-year picture was stronger than the final quarter alone suggested. Annual average nonfarm business productivity increased 2.3% in 2024, following a 1.6% gain in 2023 and a 1.5% decline in 2022, according to the bureau's accompanying annual figures.

Quarterly annualized changes and annual average changes answer different questions. The former express the pace of movement between adjacent quarters as an annual rate, while the latter compare average productivity across entire years, making it important not to treat the two measures as interchangeable.

The productivity measure also reflects more than individual workers' effort. The bureau identifies technology, capital investment, the organization of production and workforce characteristics among the influences on output per hour, so a single quarterly reading cannot isolate the cause of a change.

The February release was preliminary, leaving both the productivity and cost estimates subject to revision. At publication, the bureau scheduled an updated report for March 6, 2025, which would incorporate an annual employment-data benchmark revision and provide a firmer assessment of the year-end slowdown.