The economic slowdown took a further toll on worker productivity last quarter. Labor productivity in the nonfarm business sector slipped 0.3% (AR) after a similar 0.6% decline during Q1. The declines compare to 8% quarterly growth at the end of the last recession. (Revisions to the data reflect the latest benchmark revisions to the GDP accounts.) Productivity is calculated by dividing an index of real output by an index of hours worked by all persons. And when output growth slows, as it has, and hours worked improves as it has, productivity suffers. During Q2, real output rose at a modest 1.8% rate (2.5% y/y), while hours worked rose an improved 2.0% (1.6% y/y).

Accompanying the slow productivity growth was, not surprisingly, a slowdown in compensation. The 1.9% q/q increase was half that in Q1 and left the y/y change roughly stable at 2.1%. Together, the productivity and compensation figures raised unit labor costs at a 2.2% rate. The figure was up from the declines of 2010 and 2009.

Factory sector productivity also suffered the effects of slower output growth last quarter. In fact, productivity declined for the first time since Q1 2009 due to a negligible 0.6% increase in output (4.4% y/y) while hours worked rose 2.6% (2.1% y/y). As compensation costs rose at a stable 2.3% rate, unit labor costs jumped 4.4%, the strongest gain since Q4 2008.

The productivity & cost figures are available in Haver's USECON database.

Evaluating the role of labor market mismatch in rising unemployment from the Federal Reserve Bank of Chicago is available here.