Long Term Perspective
While accelerating wage gains could lead to consumer price increases, it is important to look at the missing link -- productivity. Productivity gains allow wage increases without generating inflationary pressures. Note how sharp productivity increases since 1992 were associated with only modest gains in unit labor costs - and even outright declines.

Short Term Perspective
Nonfarm productivity surged at an 8.1 percent rate in the third quarter after growing at an equally robust 7.1 percent rate in the second quarter of 2003. Looking at the yearly percent change tends to smooth out sharp fluctuations; productivity grew 4.7 percent in the third quarter after a 4.1 percent hike in the previous quarter. Productivity typically spurts in the early stages of recovery because employers have picked up production but have not increased the number of workers on staff. The robust productivity figures remain encouraging since productivity growth is associated with dampening inflationary pressures and allowing wages to grow more rapidly. However, strong productivity growth can dampen employment growth as long as sales demand is not consistently strong.

At the same time, unit labor costs fell at a 4.5 percent rate in the third quarter, the six quarterly decline over the past nine quarters. On a year-over-year basis, unit labor costs edged down 1.9 percent, following the trend of the past several quarters. Lower labor costs mean higher profitability for corporations.

Alternative Inflation Measures   •   Gold Prices   •   Employment Cost Index   •   Civilian Unemployment Rate

Pool of Available Labor   •   Nonfarm Productivity   •   Treasury Yields   •   Stock Prices   •   Fed Monetary Policy Summary