Higher productivity to start 2026 just means more profits, not better wages

Whether it's added AI investment or just worker improvements, the US saw higher productivity to start off 2026.

Labor productivity, or output per hour, is calculated by dividing an index of real output by an index of hours worked by all workers, including employees, proprietors, and unpaid family workers. During the current business cycle, starting in the fourth quarter of 2019, labor productivity has grown at an annualized rate of 2.1 percent, reflecting a 2.5-percent rate of growth in output and a 0.4-percent rate of growth in hours worked. The 2.1-percent annualized rate of nonfarm business productivity growth in the current business cycle thus far is higher than the 1.5-percent rate of the previous business cycle, from the fourth quarter of 2007 through the fourth quarter of 2019, and just below the long-term rate of 2.2 percent since the first quarter of 1947.

This graph from the Bureau of Labor Statistics explains a lot, showing that productivity has been responsible for virtually all increases in nonfarm output for 3 years.

And it’s even more so in the manufacturing sector, where hours works have consistently declined over the last 3 years, including at the start of 2026.

Manufacturing sector labor productivity increased 3.6 percent in the first quarter of 2026, as output increased 3.3 percent and hours worked decreased 0.4 percent. In the durable manufacturing sector, productivity increased 5.3 percent, reflecting a 5.4-percent increase in output and a 0.1-percent increase in hours worked. Nondurable manufacturing sector productivity increased 2.0 percent, as output increased 0.9 percent and hours worked decreased 1.0 percent. Total manufacturing sector productivity increased 1.7 percent from the same quarter a year ago.

Here’s an extra kicker – workers didn’t get financial benefits from being more productive in the first three months of 2026.

BLS calculates unit labor costs as the ratio of hourly compensation to labor productivity. Increases in hourly compensation tend to increase unit labor costs and increases in productivity tend to reduce them. Real hourly compensation, which takes into account consumer prices, decreased 0.5 percent in the first quarter of 2026, and increased 1.4 percent over the last four quarters. The labor share, which is the percentage of output that accrues to workers in the form of compensation, was 54.1 percent in the first quarter of 2026, the lowest recorded value since the series began in 1947.

Oh? The lowest share of worker compensation in at least 79 years? It’s almost like owners have used technological advances to grab profits for themselves and keep it away from the workers that made it possible! Especially in the 2020s.

That loss of real worker compensation isn’t going to get better in Q2, as Friday's tepid increase of 0.2% isn't going to come close to keeping up with the inflation we had in April. And with gas prices going up another 25 cents a gallon nationwide in the first week of May, that declining situation for US workers doesn't seem to be ending any time soon.

Which makes you wonder when a lot of workers start asking why they should go along with productivity "improvements", since it doesn’t seem to give them much in return.