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Economic Report: U.S. labor costs surge in third quarter due to higher wages and production snafus

Businesses paid sharply higher labor costs in the third quarter to produce their goods and services, reflecting higher worker pay and a slowdown in production tied to widespread bottlenecks in the economy.

So-called unit-labor costs jumped 8.3% in the period from July through September, the government said Thursday. These costs reflect how much a business spends to produce one unit of output, such as a new car, a keg of beer or a crate of toys.

Companies are paying higher salaries and benefits to attract new workers and hold onto to existing ones amid the biggest labor shortage in decades. The amount of wages and benefits paid to workers rose at a 2.9% pace in the third quarter.

Other measures of labor costs have also risen sharply in the past year.

At the same time, businesses cannot get enough supplies on time to keep production going at full tilt. So even as hours worked increased 7% in the third quarter, output only increased 1.7%.

As a result, U.S. productivity sank at a 5% annual pace. Productivity is determined by the difference between output and hours worked.

It remains to be seen whether the surge in labor costs is sustained.

Major shortages of labor and supplies are widely expected to ease over the next year as the U.S. and global economies return to normal. If so, production would likely speed up and wage increases would moderate.

What’s less clear is what happens to productivity — the key to a higher standard of living. Faster productivity gains allow companies to pay workers more and maintain profits without stoking inflation.

Before the pandemic productivity growth had picked up from very low levels in the prior decade, but it was still running well below historic norms. Low productivity helps explain why the standard of living has improved more slowly in recent times.

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