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What Is "Productivity"?

The U.S. Department of Labor revised its third-quarter productivity numbers upward today to a seasonally adjusted 5.1% for nonfarm business activity. That's a 5.6% increase over last year's July-September period, the biggest year-over-year jump since 1973.

It all sounds good, but what does it mean?

According to Phyllis Otto of the Bureau of Labor and Statistics (BLS), productivity is essentially output per unit of input. In other words, how many goods and services were produced for each hour of labor logged by American workers. It sounds simple, but the number crunchers at the Labor Department must figure out how many hours Americans were on the job, using such sources as the BLS Current Employment Statistics program, the Office of Productivity and Technology, and the BLS Current Population Survey.

The "output" for the business sector is essentially the gross domestic product (GDP) minus the production of the government, nonprofit institutions, paid employees of private households, and the rental value of owner-occupied dwellings. The result is a measure of approximately 77% of the total value of final goods and services produced by the economy. (The word "final" is important, because GDP takes into account just goods that won't be resold. For example, if you grow corn that will be consumed by buyers of Len & Harry's corn-flavored ice cream, the money you make from the sale won't be part of the GDP, but the total value of corn ice cream sales will.)

The good news about productivity? Theoretically, businesses are earning more per worker, which could boost profits. It might also raise incomes, and perhaps encourage businesses to start hiring again. Finally, more profits allow businesses to increase their payrolls without raising the prices of goods and services, so higher productivity keeps inflation in check. The not-as-good news is that productivity is a volatile measurement, and most experts expect productivity (and the GDP) to slow down in the fourth quarter.

Still, the biggest jump in productivity in almost 30 years is a good sign for a struggling economy.

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