US Worker Productivity Rises Moderately in Q3; Labor Costs Elevated

In the third quarter of 2024, US worker productivity rose moderately, with labor costs remaining elevated. This trend, driven by a rebalanced labor market and wage growth compression efforts by employers, has significant implications for the US economy and monetary policy. Let's delve into the details and explore the potential impacts of these developments.


The Labor Department reported that US labor productivity in the business sector grew 2.2% in the third quarter, extending a trend of improved output per hour (Source: Morningstar, Nov 7, 2024). This growth, coupled with a rebalanced labor market, led to a moderate 0.8% gain in the Employment Cost Index (ECI) in Q2, with wages and salaries also rising 0.8% (Source: EY, Q3 2024). The all-important private sector wages and salaries gauge also rose a moderate 0.8%, well below the average 1.0% over the prior four quarters.

The slowdown in headline ECI compensation and private sector wage growth contributed to the moderate rise in US worker productivity in Q3 2024 by easing labor cost pressures on businesses. The 0.8% gain in the Employment Cost Index (ECI) in Q2, the smallest since Q3 2020, and the 0.8% rise in private sector wages, the lowest since Q3 2020, allowed companies to maintain profit margins while investing in productivity-enhancing technologies and processes. This shift in labor cost dynamics, coupled with a rebalanced labor market, enabled businesses to improve output per hour, leading to a 2.2% increase in labor productivity in the third quarter.


The ongoing price and wage growth disinflation, along with strong productivity growth, has favored a gradual recalibration of Fed policy. The Fed is expected to ease monetary policy with a 25 basis points (bps) rate cut post-election, following an outsized 50bps "catch-up" rate cut in September (Source: EY, Q3 2024). This policy shift reflects the Fed's forward-looking perspective, acknowledging the need to balance inflation concerns with economic growth and labor market conditions.

In conclusion, the moderate rise in US worker productivity in Q3 2024, driven by a rebalanced labor market and wage growth compression efforts by employers, has significant implications for the US economy and monetary policy. The slowdown in headline ECI compensation and private sector wage growth contributed to the productivity gains, while the ongoing price and wage growth disinflation, along with strong productivity growth, has favored a gradual recalibration of Fed policy. As the US economy continues to navigate these trends, investors and policymakers alike should remain attuned to the evolving labor market dynamics and their impact on productivity, inflation, and monetary policy.