March 5, 2026
Unit labor costs might be a term that is not familiar to you. Unit labor costs represent the increase in compensation adjusted for the gains in productivity. You might think that if labor costs are rising that would put upward pressure on inflation. It does not matter so much what wages are doing, but what wages adjusted for the change in productivity is doing. Think of it this way. If I pay you 3% more money, on the surface you might think that my costs as a businessman have just gone up by 3%. That is not quite true. What if you are 3% more productive? Then I am getting 3% more output from you, so I really do not care. I am very happy to pay you 3% more money. In this case, unit labor costs, or labor costs adjusted for the gain in productivity, are 0%. To take the example one step farther, if I pay you 3% higher wages but you are no more productive, then unit labor costs are rising by 3% and I am probably going to raise my prices to offset the higher cost of labor. So, a gain of that magnitude in unit labor costs is quite likely to exert upward pressure on inflation. So always watch what is happening to unit labor costs and not just wages.
Unit labor costs rose 2.8% in the fourth quarter after having fallen 1.8% in the third quarter. In the third fourth compensation rose 5.7% while productivity rose 2.8%. which, when combined, resulted in a 2.8% increase in unit labor costs. In the past year unit labor costs have risen 1.3%. Going forward we expect compensation to increase about 4.0% while productivity rises 2.5% which means that unit labor costs should rise 1.5%. In our opinion a 1.5% increase in unit labor costs is entirely consistent with a 2.0% inflation rate.
Stephen Slifer
NumberNomics
Charleston, SC
Stephen, I am sorry but I had not heard of Unit Labor Costs before, my problem, but I found your explaination most interesting and sensible. If I am thinking properly, I would guess that the reason the labor costs would increase while the productivity would decrease has to do with the fact the the labor force got raises because of a reduced pool of workers and the workers in place just continued to produce as they had previously. Am I making sense? Seems a possible answer to the question.
I continue to enjoy reading your weekly commentary. Writing easily understood explanations of complex subject matter is a real talent that you have. Thanks for sharing with the rest of us.
…Darrel
Interesting concept and certainly see the importance. I am in healthcare and wonder if unit labor cost are done for healthcare teams especially technologist and physicians.
The other thought? Would the efficiency gained by AI just be part of the business costs or should it be part of the ULC?
Hello Dr. Munden
I do not know of any data for productivity and unit labor costs for the healthcare industry. Here is the report that comes from the Bureau of Labor Statistics.
https://www.bls.gov/news.release/pdf/prod2.pdf
It breaks out the dataa for the nonfarm business sector, manufacturing (as well as for manufacturing of durable and nondurable goods), and the nonnfinancial corporate sector. The productivity and unit labor costs data for those sectors are on Page 1A.
I did a Google search on productivity in the medical industry and found the following. They seem to be helpful, but somewhat dated.
AI Overview
Productivity in the U.S. medical industry has struggled with low growth or declines, with labor productivity in private community hospitals dropping 2.0% in 2022 and averaging only 0.1% growth from 1993 to 2022. The sector is experiencing a, Medical Economics report “dire” state where operating income per employee fell 7.6% annually from 2018–2023. Key issues include a, Boston Consulting Group report heavy reliance on expanding the workforce rather than technological efficiency, resulting in high burnout and, Brookings article negative productivity growth.
McKinsey & Company
McKinsey & Company
+4
Key Trends and Data
Declining Productivity: Labor productivity in hospitals has faced significant challenges, including a decline during the COVID-19 pandemic and a, McKinsey report negative contribution from multifactor productivity (MFP) to industry growth.
High Input, Low Output: The industry is highly labor-intensive, with, McKinsey report labor contributing 99% of growth between 2001 and 2016, leading to a, Boston Consulting Group report “revolving door” of staff.
Inefficiency and Costs: Health-related work losses cost U.S. employers over $260 billion annually, according to the National Institutes of Health (NIH).
Disparity: While productivity is low overall, there is high, National Bureau of Economic Research (NBER) dispersion among providers; however, more productive hospitals tend to gain higher market share.
McKinsey & Company
McKinsey & Company
+5
Drivers for Improvement
AI and Automation: A, Medical Economics report “Human + Machine” approach is recommended to automate administrative tasks, with 73% of executives recognizing automation as essential for future capacity.
Operational Shifts: Potential improvements of 9 to 15% in national health expenditure (NHE) exist through AI, technology, and, McKinsey report care model innovations.
Teamwork and Training: Factors like improved, National Institutes of Health (NIH) team collaboration, better management, and training are identified as key to boosting worker productivity.
McKinsey & Company
McKinsey & Company
+2
Challenges in Measurement
Measuring productivity in healthcare is, Brookings article notoriously difficult because output (health improvement) is harder to quantify than in manufacturing.
The sector often sees, Brookings article lower productivity growth than the rest of the economy