The Bureau of Labor Statistics of the U.S. Department of Labor today reported preliminary productivity data--as measured by output per hour of all persons--for the third quarter of 2001.


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The Bureau of Labor Statistics of the U.S. Department of Labor today reported preliminary productivity data--as measured by output per hour of all persons--for the third quarter of 2001. The preliminary seasonally-adjusted annual rates of productivity growth in the third quarter were:

2.2 percent in the business sector and
2.7 percent in the non-farm business sector.

In both the business and the non-farm business sectors, productivity increases in the third quarter occurred because hours fell more than output. In manufacturing, productivity changes in the third quarter were:

1.1 percent in all manufacturing;
2.5 percent in durable goods manufacturing; and
-1.3 percent in non-durable goods manufacturing.

Bureau of Labor Statistics Press Release, November 7, 2001.

The original press release is available at:

Of these five numbers, the one most often discussed in press and television reports is the rate of increase in productivity in the non-farm business sector.

Data Trends

Figure 1: Changes in Nonfarm Business Productivity (Percent Change in Output per Hour) Quarterly Changes 1998-2001


The increase in productivity growth during the third quarter of 2001 was the highest in a year. While the Department of Labor made adjustments in the figures in an attempt to accurately reflect the effects of the terrorist attacks of September 11, it is likely that even these adjusted figures will be subject to future revisions that are larger than normal.

The latest productivity data indicate that businesses are adapting to the slowing growth in total output that has occurred over the past few quarters by adjusting employment and the hours worked. Employment has decreased over the past three months and businesses are reducing the hours worked by each employee as well. In the third quarter, output in the non-farm business sector decreased (-1.0 %) and hours of employees decreased at a faster pace (-3.6%). The decrease in output by itself lowers productivity. The fact that 3.6% fewer hours were used to produce increases the measured productivity. Thus, the change in productivity was -1.0% + 3.6% = 2.6%. (The numbers do not exactly add up to the reported number, 2.7, due to errors in rounding). See the latest Unemployment case for a description of recent changes in employment.

In spite of the increase in the most recent quarter, the changes in productivity during 2001 have been less than the changes in the previous three years. The increases in productivity for all of 2000 (annual average of 3 percent) exceeded increases in 1998 (2.6 percent) and 1999 (2.3 percent). The longer run trend in productivity has allowed real GDP per capita to increase. It also means that wages for workers can increase and can do so without excessive upward pressures on prices. Hourly compensation rose at an annual rate of 4.8 percent during the quarter. Unit labor costs are the costs of labor per unit of output. Thus the increase in unit labor costs is the percentage increase in hourly compensation minus the percentage increase in productivity. Or 4.5% minus (2.7%) = 1.8%.

The increase in unit labor costs provides evidence that there are still some minor inflationary pressures. However the recent slowing growth and the decline in the most recent quarter in real GDP and increase in the unemployment rate to 5.4% provide additional evidence that inflationary pressures are unlikely to be serious.

Productivity Growth in the Future

On November 6, 2001, the Federal Reserve Board lowered the target federal funds rate to its lowest level in 40 years. In their announcement, they made the following statement concerning productivity.


The Federal Reserve recognizes that the terrorist activities on September 11, 2001 prompted increased security measures for businesses across the country. That increased spending on security means that it will take more hours of labor to produce the same output. Thus the expectation is that productivity will fall as a result of that change. However, the Federal Reserve remains optimistic that productivity growth will continue in the long run after the economy has adjusted to the needed increased security expenses.

Historical Data Trends

Figure 2: Changes in Nonfarm Business Productivity (Percent Change in Output Per Hour) Annual Changes 1970-2000

From 1950 to 1973, productivity grew at an average annual rate of 2.8 percent. But from 1973 to 1995, growth in productivity slowed to an increase at an annual rate of 1.4 percent. From 1996 to 2000, productivity again increased at an annual rate of 2.5 percent.


The rest is not understood. It may be due to cyclical pressures (that is, fewer workers were being added to employment rolls, but those who were working were producing more) and perhaps to the effects of lower business costs as a result of business use of the internet.


  1950 -73 1973 - 95 1995 - 00 Future
Growth in hours worked 1.6% 1.7% 1.7% 1.2%
Productivity 2.8% 1.4% 2.5% 2.0%
Real GDP 4.2% 3.0% 4.0% 3.0%

(The percentage change in hours worked plus the percentage change in productivity is not always exactly equal to the percentage change in real GDP due to rounding and the inclusion of slightly different measures in the productivity and hours calculations. However, increases in the growth in hours worked and increases in productivity will cause similar increases in the growth rates of real GDP.)

Definitions of Productivity




How The Data Are Calculated



Importance Of Productivity Changes For Economic Growth



The Impact Of Revisions To Productivity Data

The "preliminary" productivity figures are announced slightly more than one month after the end of a quarter. The "revised" productivity figures appear after one more month.

Periodically, additional revisions are made to the productivity data. This last summer revisions were made in the 1999, 2000, and the first quarter 2001 figures. The effects of those revisions were to lower the previously estimated increases in productivity. For example the rate of increase for 1999 was lowered from 2.6 to 2.3 percent and 2000 lowered from an increase of 4.3 percent to an increase of 3.0 percent.

These revisions have received a great deal of press attention - primarily focused on the overestimation of productivity growth. Despite the downward revisions in last two years' productivity growth, productivity was still increasing; the gains were just smaller. Increases in productivity over the past few years has allowed companies to generate more revenues, leading to higher profits and wages without inflationary pressures. Therefore, although the data may have overstated the increases in productivity, the effects of increases in productivity on the economy were real.

A Classroom Activity On Productivity

Assessing the Effects of Capital, Labor, Technology, and Learning on Output



[These circles will probably be very rough around the edges and only approximate a circle. The teacher must make sure that the students are tearing fairly regular shaped circles in order for later sections of this activity to apply. Students may suggest that circle production can be increased by having more students participate, using scissors, or discussing the methods of tearing out circles. Suggestions on how to increase the quality of the circles may include using a compass or an object to trace as well as using scissors.]




[When the labor force is doubled, more circles should be produced. They may be the same quality as the ones produced with the original labor force. Real output per capita will have increased as the number of circles produced divided by the size of the class will have increased. Determine if the productivity per worker increased. It should be approximately the same or may have decreased. One would expect a decrease in productivity of labor, because of diminishing marginal returns when the amount of capital is held constant. Note that individual workers in the labor force may have different productivity levels and this in turn may have affected the outcome.]


[By discussing how to approach the task of making circles, the group may come up with more efficient methods of production. For example, one student might trace circles on paper while another student starts cutting circles out. This is specialization of tasks. The main effect here may be on the quality of the product. Output may fall and productivity may fall, but overall the circles should be of higher quality. Enhanced technology and capital, with labor at a constant, should increase productivity. Ideally, in this scenario, output and quality are the highest. Therefore, this should represent the highest levels of productivity.]


  1. If these groups were four separate countries (one with only labor, one with labor and capital, one with a larger labor force and capital, and one with enhanced technology), which would have the highest productivity rates? Compute productivity and real GDP per capita (the size of the class) for each scenario.


  2. Compare the circles from the economy with only labor and the economy with labor and capital. Which of the two produced the higher quality circles? Which circles do you value more? How might the quality of some circles be reflected in prices?






Additional Questions

You may have students answer these additional questions verbally or on this worksheet.





