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Labor Productivity Rises Again In 2005

Growth is less than in 2004; unit labor costs worsen on strength of wage increases

by William J. Storck
February 6, 2006 | A version of this story appeared in Volume 84, Issue 6

Labor productivity in the U.S. chemical industry increased in 2005, according to calculations using preliminary data from the Federal Reserve Board and the Department of Labor. This is the industry's 23rd straight year of rising productivity, or output per workhour, as it reduces employment while increasing output from chemical plants.

Meanwhile, unit labor costs-a more volatile measure of the cost of labor per unit of output-increased in 2005 for the third year in a row, no doubt to the chagrin of chemical companies.

The data show that chemical productivity rose 2.4% in 2005 to an index of 133.6 (all indexes are 1997 = 100), compared with a 3.2% increase in the previous year. The increase came on lower employment of production workers and a lesser decrease in chemical production. But unit labor costs showed a slight rise of 0.3% to an index of 93.3. The 0.3% increase matched the 2004 rise.

The increase in productivity, however, did not come on much of an increase in production. Largely because of Hurricanes Katrina and Rita, the average production index last year slid 0.3% from 2004. But aggregate workhours, the divisor in the productivity equation, dropped 2.5%, sending productivity higher. Aggregate workhours are a product of the number of production workers and the hours they work. In 2005, production employment fell 1.2%, and the average workweek declined 1.4%.

Likewise, the increase in unit labor costs for chemicals was caused by a 2.6% increase in hourly wages.

Chemical productivity trailed that of all U.S. manufacturing sectors last year, as it did in 2004. Output per hour for manufacturing as a whole rose 3.7% to an index of 159.6. This jump followed a 5.1% increase in 2004. Unit labor costs for chemicals also trailed the same measure for all manufacturing, which fell 1.1% in 2005, following a 2.4% drop in 2004.

Within the chemical industry, the largest productivity increase was seen in the agricultural chemicals sector, where output per hour rose 6.0%. The remaining five sectors were all below the productivity growth rate for chemicals as a whole.

Productivity for basic chemicals rose 1.9% to an index of 155.8, and the soaps and toiletries sector was up a meager 0.8% to 116.8.

Productivity for the three other major sectors fell, with paints and coatings leading the way with a 2.0% decline in output per hour to an index of 91.2. The paint decline was closely followed by a 1.9% slide in the index for pharmaceuticals to 105.2 and a 1.8% drop in the plastic resins, rubber, and fibers segment to an index of 128.2.

Regarding unit labor costs, only paints and coatings showed a decline, but it was a pretty good 2.6% drop to an index of 128.2. The largest increase was in the resins, rubber, and fibers sector, which experienced a jump of 6.4% to an index of 94.6.

The resins sector was followed by agricultural chemicals, where the unit labor cost index rose 4.1% to 126.8; soaps and toiletries, which was up 3.8% to 114.1; and pharmaceuticals, which rose 3.7% to 129.1. Finally, the basic chemicals index rose just 0.5% to 75.8.


Table: Productivity

Output of chemicals per hour continued to climb in 2005
but labor costs per unit of production were up slightly for the chemical industry as a whole


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