Nonfarm business sector labor productivity increased at an 8.1 percent annual rate during the third quarter of 2009, the U.S. Bureau of Labor Statistics reported. This was the largest gain in productivity since the third quarter of 2003, and reflects a 2.9 percent increase in output and a 4.8 percent decline in hours worked.

Labor productivity is calculated by dividing an index of real output by an index of the combined hours worked of all persons, including employees, proprietors, and unpaid family workers. The productivity measures released today were based on more recent and more complete data than were available for the preliminary report issued last month (see Revised measures).

Unit labor costs in nonfarm businesses fell 2.5 percent in the third quarter of 2009, as productivity grew at a faster rate (8.1 percent) than hourly compensation (5.4 percent). Unit labor costs declined 1.4 percent over the last four quarters. BLS defines unit labor costs as the ratio of hourly compensation to labor productivity; increases in hourly compensation tend to increase unit labor costs and increases in output per hour tend to reduce them.

Manufacturing sector productivity grew 13.4 percent in the third quarter of 2009, as output rose 8.4 percent and hours worked fell 4.4 percent . The third quarter gain in manufacturing productivity was the largest in the series, which begins in the second quarter of 1987. Over the last four quarters, manufacturing productivity grew 3.0 percent. Manufacturing unit labor costs fell 6.1 percent in the third quarter of 2009, but rose 3.0 percent over the last four quarters.

The data sources and methods used in the preparation of the manufacturing output series differ from those used in preparing the business and nonfarm business output series, and these measures are not directly comparable.

Revised measures

In the third quarter of 2009, nonfarm business productivity was revised down from 9.5 percent to 8.1 percent, reflecting a downward revision to output and an upward revision to hours. Unit labor costs declined 2.5 percent rather than falling 5.2 percent as previously reported; this upward revision was due both to the downward revision to productivity and the 1.6 percentage-point upward revision to hourly compensation. In the manufacturing sector, upward revisions to both output and hours affected productivity, which was revised slightly down by 0.2 percentage point.

In the second quarter of 2009, nonfarm business productivity was not revised. However, unit labor costs were revised to show zero growth during the second quarter rather than decreasing 6.1 percent as previously reported. This upward revision to unit labor costs was due solely to the large upward revision to hourly compensation. In the manufacturing sector, second quarter productivity was not revised; unit labor costs were revised upward by 1.3 percentage points.