Key Takeaways
Worker productivity rose at its fastest pace in two years in the third quarter, while workers actually lost buying power because pay raises didn’t keep up with inflation.
Economists said productivity growth is the key to raising standards of living in the long run.
Technology, including AI, promises to raise productivity, but it’s an open question how much workers will benefit.
Labor productivity surged in the third quarter but paychecks didn’t surge along with it.
That’s according to a report Thursday from the Bureau of Labor Statistics, which found that labor productivity rose at a blistering annualized rate of 4.9%, the fastest since 2023. Meanwhile, hourly compensation decreased 0.2% in the quarter after taking inflation into account, leaving workers with less buying power overall despite being more productive.
Economists took the uptick in productivity as healthy for the long-term prospects of the economy. Generally, if workers are able to create more value with less labor due to advances in technology or other improvements, living standards can rise, and wages can increase without causing inflation.
“When workers are more productive, firms tend to enjoy increased profitability, which can provide them flexibility to absorb higher costs, reinvest in the business or lower selling prices. The current cycle’s pace thus should help to allay concerns over inflation’s recent persistence,” economists at Wells Fargo Securities wrote in a commentary.
What This Means For The Economy
Higher productivity is the key to raising living standards, and allows wages to rise without inflation accelerating along with them over the long run.
Experts took the overall optimistic outlook with a teaspoon of salt. Productivity figures have vaulted up and down this year due to changes in government policy, and forecasters don’t expect the 4.9% annual rate to be sustained.
The boost in productivity also suggested the goal of companies adopting artificial intelligence software—doing more work with fewer workers—is attainable even if it hasn’t necessarily materialized yet.
“If productivity growth continues to accelerate due to tax cuts, deregulation, and technological advancements, including AI, economic growth can pick up without causing unwanted inflation,” Matthew Martin, senior economist at Oxford economics wrote in a commentary.
Whether that trend ultimately benefits workers is another question. Martin noted the paltry wage gains as evidence that the economy can grow without improving the labor market for job-seekers: a “jobless expansion.”
“It’s tempting to think productivity gains in 2025 were driven by AI,” Oren Klachkin, financial markets economist at Nationwide, wrote in a commentary. “It may be having a benefit on the margin, but it’s likely too early to say AI is a driving force. AI’s productivity boost–if it indeed occurs–will likely take years to play out.”