Labor productivity rose in the fourth quarter by more than forecast after the strongest advance in five years, adding to evidence that companies are striving for greater efficiency to contain costs.
Productivity, or nonfarm employee output per hour, increased at a 2.8% annualized rate, data from the Bureau of Labor Statistics showed Thursday. In the third quarter, productivity growth was revised up to a 5.2% pace.
The recent trend in efficiency has helped ensure wage pressures remain contained, corroborating views of Federal Reserve officials that the labor market is no longer a source of inflation.
Labor costs are the biggest expense for many businesses, so companies turn to new technology and equipment to improve worker efficiency. Business spending on technologies like artificial intelligence has allowed some firms to get by with leaner staffing, which contributed to tepid hiring last year.
Unit labor costs — what businesses pay employees to produce one unit of output — rose 2.8% in the fourth quarter after declining in the prior two periods.
While economic growth slowed at the end of last year, that largely reflected the impact of the longest-ever U.S. government shutdown. Federal government spending declined by the most since 1972. However, business investment continued to rise at a solid pace.
The median projection of economists surveyed by Bloomberg called for a 1.9% advance in the fourth-quarter productivity. For all of last year, productivity increased 2.2%, while labor costs rose 1.9% in 2025, the BLS report showed.
Economists generally expect efficiency gains to continue this year amid the steady rush of investment in AI. Moreover, capital investment incentives in President Donald Trump’s One Big Beautiful Bill Act could encourage additional investment going forward.
The productivity report showed fourth-quarter nonfarm business output climbed an annualized 2.6%. Hours worked fell 0.2%, while hourly compensation, unadjusted for inflation, increased 5.7%. After adjusting for inflation, worker compensation rose at the fastest pace in more than a year.
Separate figures out Thursday from Challenger, Gray & Christmas Inc. showed announced job cuts declined in February from a year ago. The number of applications for unemployment insurance remained low last week, adding to signs of a steadying 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.
