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What is productivity and costs?

By Mensholong Lepcha

Reviewed by Alexandra Pankratyeva

Fact checked by Rachel Roberts

a person is sitting in front of a diagram

Productivity and costs are economic data metrics that are used to measure and predict inflation trends. Productivity measures labour efficiency and health of the manufacturing and services sector in a nation. Cost measures unit labour cost for producing each unit of goods and services in an economy.

In this article we will learn what productivity and costs mean. 

Productivity and costs definition

According to the US Bureau of Labor Statistics (BLS), unit labour cost is the money a business pays its workers to produce one unit of output, where output is goods and services produced in a specific time period. These costs will include wages and benefits such as health insurance and retirement contributions.

How does productivity relate to labour costs? According to BLS, labour productivity is a measure of economic performance that compares the amount of goods and services produced with the number of hours worked to produce those goods and services. 

It is important to measure productivity and costs to find opportunities to increase output without increasing costs. 

As the US Bureau of Labor Statistics put it: “Increase in inputs impose costs on society. Increasing labour means having less leisure time. Increasing investment in capital means lowering current consumption and increasing material inputs reduces reserves of natural resources.”

According to BLS, productivity increases have enabled US business sectors to produce nine times more goods and services since 1947 with a relatively small increase in hours worked.

Productivity and costs report: Inflation trends

What is the relationship between productivity and cost and inflation? Productivity and costs monitor wage trends, which can reflect trends of inflation in an area or a nation. High wage growth reflects a strengthening economy. It can also indicate that more money is in circulation in the economy which thereby could signal rise in inflation. 

Inflation, which is the decline in purchasing power of money over time due to increasing supply of money, is an important metric that is monitored by governments, financial institutions, corporations and stock, bond and commodities market participants. 

Bond markets benefit from low inflationary conditions, when the market does not expect interest rates to increase, which is done to reduce the supply of money in an economy to stem inflation. Among stocks, high inflationary conditions tend to hurt company profits due to rising costs. Meanwhile, commodities like nickel or iron ore could benefit from high inflation scenarios due to rising raw material prices.

Therefore, productivity and costs measures are followed closely by the market as it not only represents the health of the manufacturing and services sector of a nation but also gives clues on wage trends and inflation outlook of an economy. The US Bureau of Labor Statistics releases quarterly productivity and cost reports for 46 industries across the nation.

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