Labor productivity rose more than expected in the fourth quarter after the strongest progress in five years, adding to evidence that companies are seeking greater efficiency to keep costs in check.
Productivity, or the output of nonfarm workers per hour, rose 2.8% year over year, data from the Bureau of Labor Statistics showed Thursday. In the third quarter, productivity growth was adjusted upwards to 5.2%.
The recent trend in efficiency has kept wage pressures in check, confirming the views of Federal Reserve officials that the labor market is no longer a source of inflation.
Labor costs are the largest expense for many companies, so companies are turning to new technology and equipment to improve employee efficiency. Corporate spending on technologies like artificial intelligence is allowing some companies to get by with a smaller workforce, which contributed to tepid hiring last year.
Unit labor costs – what companies pay their workers to produce one unit of output – rose 2.8% in the fourth quarter, after falling in the previous two periods.
Although economic growth slowed late last year, this largely reflected the impact of the longest US government shutdown on record. Federal government spending has fallen the most since 1972. However, business investment has continued to rise at a strong pace.
The average projection of economists surveyed by Bloomberg called for productivity growth of 1.9% in the fourth quarter. For the year, productivity rose 2.2%, while labor costs rose 1.9% in 2025, the BLS report found.
Economists generally expect efficiency gains to continue this year, amid the steady flow of investment in AI. Additionally, the capital investment incentives in President Trump’s One Big Beautiful Bill Act could encourage additional investment in the future.
The productivity report shows that non-farm production increased by 2.6% year-on-year in the fourth quarter. The number of hours worked fell by 0.2%, while hourly wages, not adjusted for inflation, rose by 5.7%. After adjusting for inflation, employee compensation rose at the fastest pace in more than a year.
From separate figures from Challenger, Gray & Christmas Inc. Thursday showed that announced job losses in February fell compared to a year ago. Unemployment insurance claims remained low last week, contributing to signs of a stabilizing labor market.
The government’s monthly jobs report, due Friday, is expected to show a moderate pace of hiring and stable unemployment after a strong start to the year.
Saraiva writes for Bloomberg.
