US Third-Quarter Labor Costs Revised Sharply Higher as Worker Productivity Falls

The government reported on Wednesday that U.S. unit labor costs surged more than initially thought in the third quarter, suggesting inflation could remain high for a while.

Today’s data confirms a tight labor market. This is the second time in a week this conclusion has been confirmed. The first being last Friday’s Average Hourly Earnings, a component of the Non-Farm Payrolls report.

Unit Labor Costs Accelerate

The Labor Department report showed on Tuesday that unit labor costs, the price of labor per single unit of output, accelerated at a 9.6% annualized rate last quarter. That was revised up from the 8.3% pace reported in November.

In other news, labor costs rose at a 5.9% pace in the April-June quarter. They increased at a 6.3% rate compared to a year ago, instead of the previously reported 4.8% rate.

Economists polled by Reuters had forecast unit labor costs would rise at an unrevised 8.3% pace.

The report suggests the Fed may have more work to do in taming runaway inflation.

Worker Productivity Falls

The surge in labor costs came at the expense of worker productivity, which fell at a downwardly revised 5.2% rate last quarter. Productivity was previously reported to have tumbled at a 5.0% pace. It grew at a 2.4% pace in the April-June quarter.

Another Sign of a Strong Labor Market

Last Friday in another sign of a strong labor market, Average Hourly Earnings rose 0.6% in November after a 0.5% advance in October. It was the biggest monthly rise in 10 months and nudged the annual rate to 5.1% from 4.9% in October. Wages peaked at 5.6% in March.

The acceleration in average hourly earnings and a third-straight drop in labor force participation will likely trouble Fed policymakers.

Data Confirms Powell’s Warning

Last week, Federal Reserve Chairman Jerome Powell told investors he was most worried about wages rising more than productivity, as labor supply continues to shrink.

The latest data shows the Fed is likely to keep upward pressure on interest rates until it’s clear that inflation is trending lower.