Productivity Slips, Labor Costs Jump: Time To Hire?

Small businesses received another warning sign on the U.S. economy Tuesday with a nasty combination of lower labor productivity and higher labor costs for the second quarter of 2011. Ifonically, though, the disappointing numbers may mean that businesses could be "forced" to step up hiring.

The U.S. Bureau of Labor Statistics reported that productivity slipped 0.3 percent for the quarter, while output and hours worked were up 1.8 percent and 2 percent, respectively. The Bureau reported that unit labor costs rose 2.2 percent overall for the second quarter, because hourly compensation was up 1.9 percent in the face of the productivity decline.

A number of previously reported measures for the first quarter were also revised downward, which should not really surprise anyone, given recent downward revisions in economic growth measures. For the first quarter of 2011, the new numbers indicate that productivity was off 0.6 percent, rather than up 1.8 percent as previously reported. Hourly compensation rose 4.2 percent for the quarter, which is more than was originally disclosed. Overall, labor costs were actually up 4.8 percent, when you balance out those two numbers.

Paul Dales, an economist with Capital Economics in Toronto, summed it up for Reuters: "This suggests businesses have largely exhausted the efficiency enhancing measures that resulted in impressive productivity growth over the last two years."

Maybe the productivity data is a sign that those who do have a job have reached their maximum ability to produce, as businesses of all sizes resist hiring new staff. Maybe employees are sick of overtime, even if business owners think they should just be happy to have a job. Or maybe it is because there isn't as much work to do as gross domestic product (GDP) growth contracts.There are probably dozens of underlying reasons for the trend shown in these numbers, which should prompt some soul-searching on small-business managers.

Even though most businesses remain reluctant to hire, for very good reasons, it may be time to reconsider that position as an alternative to paying oodles of overtime or risking burnout for your best employees.

Heather Clancy is an award-winning business journalist with a passion for small businesses, green technology and corporate sustainability issues. Her articles have appeared in Entrepreneur, Fortune Small Business, The International Herald Tribune and The New York Times. Follow her on Twitter.