Rewarding a lower labor cost per unit is not the same as rewarding more output per hour. BLS defines the former as hourly compensation divided by productivity. An incentive focused only on the result could therefore favor compensation restraint rather than a better production process. That is an implication of the accounting relationship, not evidence that a particular employer chose either route. [prod2_02022017]

The fourth-quarter 2016 figures give the distinction substance. Nonfarm-business productivity grew 1.3 percent, hourly compensation 3.0 percent and unit labor costs 1.7 percent, all at seasonally adjusted annual rates. Rising productivity and rising compensation coexisted, while unit costs still increased. The release does not identify which capital improvements, processes or workplace decisions produced those movements. [prod2_02022017]

The January 31 Employment Cost Index describes another side of the incentive question: what counts as compensation. Private-industry wage and salary costs rose 2.3 percent over the twelve months ending December, while benefit costs rose 1.8 percent, both unadjusted for seasonality. Total compensation costs rose 2.2 percent. Looking only at wages would omit benefits; these fixed-job-mix indexes are not the compensation numerator of BLS’s productivity calculation. [prod2_02022017][eci_01312017]

Glen’s suggested test for a performance target is to ask what behavior earns the reward: increasing output per hour, restraining compensation, or both. Capital and process improvements are possibilities to investigate, not returns established by national data. This incentive question differs from forecasting a company’s cost budget. The productivity evidence is the February 8 reissue of the February 2 release; it and the January 31 ECI share a BLS institutional origin, not independent corroboration. [prod2_02022017][eci_01312017]

Source documents

  1. Productivity and Costs, fourth quarter 2016 preliminary; February 8 reissuehttps://www.bls.gov/news.release/archives/prod2_02022017.htm
  2. Employment Cost Index – December 2016https://www.bls.gov/news.release/archives/eci_01312017.htm