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Productivity’s hidden warning
14/8/2026
U.S. productivity is rising, but workers’ pay is not keeping up with inflation. That makes the latest data more difficult to read.
In economics, there famously is no such thing as a free lunch. However, productivity growth comes closest. It means producing more, or better, output from the same inputs. When output per hour of work rises, firms can pay employees more without a matching increase in labor costs per unit of output. Yet in the U.S. labor market today, workers do not appear to be benefiting in this way.
Our Chart of the Week shows how rare this is. In the second quarter, unit labor costs rose by 1.4% year-on-year. Real hourly compensation fell by 0.1%.[1] Similar gaps have appeared before, often during periods of economic stress. The post-pandemic recovery offers the sharpest contrast to the current situation. In 2022, productivity fell as strong demand met supply bottlenecks. Prices and wages rose, but inflation still reduced workers’ purchasing power.
Today, productivity is rising again, which helps companies keep labor costs under control. According to the latest data, nonfarm business productivity had already grown faster in the first quarter than initially estimated, rising at an annualized rate of 0.8%, before accelerating to 1.4% in the second. These latest figures were well above expectations.
But higher productivity is not automatically good news for workers. Inflation is still eating into pay increases. A cooler labor market may also make it harder for workers to negotiate higher pay. As the chart shows, similar patterns have often appeared around recessions. When demand weakens or costs rise, companies often cut staff and keep their most productive employees. This can lift measured productivity, but it can also make workers less confident about asking for higher wages.
The June JOLTS report, which tracks job openings and worker turnover, provides further warning signs. Job openings edged down to 7.4 million, while the quits rate remained at 2%.[2] This points to weaker labor demand. It also suggests that workers have little confidence in finding better jobs.
That is why broader labor-market patterns may matter more than one month’s jobs number. “For anyone but a day trader, such patterns are what really matter,” argues Christian Scherrmann, Chief U.S. Economist at DWS. “Estimates of how many net jobs have been created, or in the latest release unexpectedly lost, in any given month are notoriously volatile and often revised. Despite the preliminary reading, it remains anyone’s guess whether the U.S. economy actually lost jobs in July.”
Investors should therefore be careful not to read the productivity data as purely positive. The latest increase could support margins and may strengthen some hopes around artificial intelligence.[3] But it could equally be a symptom of a weakening economy if companies are producing more with fewer workers. At the same time, some activities remain difficult to automate,[4] meaning labor could stay scarce and inflationary pressures could persist in those parts of the economy. What appears at first to be a productivity breakthrough could thus confront investors and the Federal Reserve with difficult trade-offs.
Source: Bureau of Labor Statistics; Haver Analytics; DWS Investment GmbH; latest available data as of Q2 2026
* U.S. Nonfarm Business Sector (seasonally adjusted, 2017=100)
This information is subject to change at any time, based upon economic, market and other considerations and should not be construed as a recommendation. Past performance is not indicative of future returns. Forecasts are based on assumptions, estimates, opinions and hypothetical models that may prove to be incorrect.