The US Labor Department reported on the 5th local time that unit labor costs in the non-farm business sector declined 0.7% in Q3 (July-September) on a seasonally adjusted annualized basis, defying market expectations of a 0.6% increase. This marked the first quarterly decline in five quarters since Q2 2025, reversing from Q2's 1.9% gain. Unit labor costs measure the expense employers pay workers to produce one unit of output. The decline occurred as productivity growth of 3.6% outpaced a 2.9% rise in hourly compensation, while labor hours increased 0.1%.
Productivity Gains Drive Cost Reduction in Q3
The 0.7% decline in unit labor costs resulted from the gap between compensation and productivity growth. Hourly compensation increased 2.9% in Q3, while productivity rose 3.6%, according to the Labor Department's preliminary data. Labor hours expanded 0.1% during the quarter. When productivity gains exceed compensation increases, unit labor costs typically decline as employers pay less per unit of output produced.
Manufacturing Sector Shows Mixed Productivity Results
In the manufacturing sector, unit labor costs increased 2.7% in Q3. Manufacturing productivity rose 0.3% during the quarter. Within manufacturing, durable goods productivity increased 2.2%, while nondurable goods productivity declined 1.7%. The manufacturing sector's cost dynamics differed from the broader non-farm business sector due to the smaller productivity gain.
Labor Share of Output Reaches Historic Low at 53.0%
The labor share of output, which represents the proportion of production returned to workers as compensation, stood at 53.0% in Q3. This figure marks the lowest level since the data series began in Q1 1947, according to the Labor Department. The metric indicates the percentage of economic output allocated to employee compensation versus other factors of production.
FAQ
What caused US unit labor costs to decline in Q3?
US unit labor costs fell 0.7% in Q3 because productivity growth of 3.6% exceeded the 2.9% increase in hourly compensation. When productivity gains outpace compensation growth, the cost to produce each unit of output declines.
How did manufacturing productivity perform in Q3?
Manufacturing productivity increased 0.3% in Q3. Within the sector, durable goods productivity rose 2.2%, while nondurable goods productivity declined 1.7%. Manufacturing unit labor costs increased 2.7% during the quarter.
