Cost Cutting Boosts Productivity, but Gives Rise to Unemployment

By Jason Simpkins
Associate Editor
Money Morning

U.S. worker efficiency climbed in the third quarter, but the increase was largely due to cutbacks on labor that could spur unemployment. 

Productivity, the measure that gauges employee output per hour, rose at a 1.3% annual rate in the third quarter, the Labor Department reported yesterday (Wednesday). However, this is largely because companies braced for a recession by reducing employee hours at the fastest pace in six years and keeping a lid on wages.

The number of hours worked fell at a rate of 3.1% and labor costs, a gauge of inflationary pressures climbed at a 2.8% annual rate - less than the initial estimate of 3.6%.  Labor costs were up just 1.4% from one year ago, an indication that the soft labor market is making it hard for workers to secure higher wages.

ADP Employer Services said separately yesterday that approximately 250,000 private-sector jobs were eliminated in November, the largest amount in seven years. Medium-sized businesses - those with 50 to 499 employees - led the way, cutting 130,000 jobs. Small companies decreased payrolls by 79,000, and companies employing more than 499 workers shed 41,000 jobs.

Underscoring the ADP’s labor report was equally bleak data from the Institute for Supply Management (ISM), whose index of non-manufacturing businesses dropped to 37.3, the lowest in its 11-year history.

"This is consistent with payrolls falling by about 500,000; let’s hope it is very wrong," Ian Shepherdson, chief U.S. economist at High Frequency Economics, told Reuters.

The Labor Department is expected to announce that the unemployment rate climbed to a 15-year high of 6.8% in November, according to the median estimate of analysts polled by Bloomberg. The unemployment rate edged up to 6.5% in October and could soar as high as 8% in the next 12 months, as companies continue to scale back.

"Companies can be expected to react by further cost-cutting, which inevitably means reductions in employee head count and hours worked," Joshua Shapiro, chief U.S. economist at Maria Fiorini Ramirez Inc. in New York, said in a note to clients. "While this will help support productivity and restrain unit labor costs, it will also reinforce the consumer-led aspect of the economic slump."

Declining costs for commodities also impacted productivity by reducing production costs. The average price of crude oil, for instance, fell from over $133 per barrel in July to about $77 per barrel in October. However, unemployment remains the crucial issue.

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