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Productivity Slows

Chemical output per hour increased in 2003 at lowest rate in five years, and labor costs rose

March 22, 2004 | A version of this story appeared in Volume 82, Issue 12

Productivity in the U.S. chemical industry continued its string of annual increases last year, although at a slower pace than in any of the previous four years.

Using production data from the Federal Reserve Board and employment and workhour information from the Labor Department, C&EN estimates that chemical labor productivity rose just 1.2% in 2003 over the previous year. Labor productivity is defined as output per workhour. It is calculated by dividing the production index by aggregate workhours, which in turn is a product of the number of production employees and the length of the average workweek.

The 2003 productivity increase is well below the 6.1% annual growth seen in 2002 and the 3.1% average annual growth between 1993 and 2003. And it trails, by far, the 6.4% increase last year for all manufacturing industries.

The lackluster increase in the chemical industry came despite a 6.5% drop in the number of production workers in the industry, which, all things being equal, should have signaled a greater rise in output per hour. However, a slightly higher average workweek, plus essentially flat production, slowed the productivity gain.

Among the six chemical sectors, performance was fairly good, except for pharmaceuticals, where output per hour declined 4.4% from where it had been in 2002. Despite some large overall staff reductions, the drug sector actually added production workers last year, resulting in an employment increase of 5.0% over 2002. And the average workweek for the sector rose 0.2%, which, when coupled with the increase in workers, resulted in a 5.2% jump in aggregate production hours.

The decline in pharmaceutical productivity also had an effect on unit labor costs for the chemical industry. Unit labor costs, or labor cost per unit of output per hour, are calculated by dividing an hourly wage index by the productivity index. Ideally, unit labor costs fall as productivity rises. But the 4.4% decline in pharmaceutical productivity and a 9.1% increase in hourly wages produced a huge 14.2% jump in unit labor costs for the drug sector.

Thus, despite rising productivity for chemicals overall and declining unit labor costs for every chemical sector except drugs, unit labor costs for the entire industry rose 1.8% for the year as hourly wages, because of pharmaceuticals, increased 3.1%.

The chemical industry, perhaps because it pays well compared with other manufacturing sectors, has fared poorly over the past decade in terms of labor costs. While productivity rose since 1993 at an average annual rate of 3.1% for chemicals and 5.7% for all manufacturing, chemical unit labor costs declined just 0.2% per year. By comparison, unit labor costs for all manufacturing fell 2.6% annually during the period.

Within the chemical industry, the best productivity gains were in the paint, coatings, and adhesives sector and in the agricultural chemicals sector, up 6.4% and 3.1%, respectively. Basic chemicals, the largest industry sector, improved its output per workhour by 2.7%.

As should be expected, the same sectors led the declines in unit labor costs--agricultural chemicals, down 5.8%; paint, coatings, and adhesives, down 3.8%; and basic chemicals, down 1.4%.

TABLE - PRODUCTIVITY Output per hour showed some improvement for most chemical sectors in 2003 ... ... but unit labor costs also rose for total chemical industry


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