While U.S. economic growth was sparking demand for chemicals and allied products in 1994, driving up sales, the bottom line was being helped by additional factors. Two of these were productivity and the related unit labor costs.
Productivity in the U.S. chemical industry rose once again last year and unit labor costs fell, according to C&EN estimates based on data from the Federal Reserve Board and the Department of Labor. Productivity is output per hour calculated by dividing the index for production by the index for aggregate production hours. Unit labor costs are the cost of labor per unit of output, calculated by dividing the index for hourly wages by the productivity index. The productivity index improves when it increases, and the unit labor cost index improves when it declines.
Using the government data, C&EN estimates that productivity for chemicals and allied products grew 3.2% in 1994 over the previous year to an index of 121.4. (All indexes are benchmarked to 1987 to make them conform to the government's index of industrial production.) The increase came on a 4.2% increase in output and a much lower 1.0% rise in workhours of production.
The increase in productivity for 1994 was about the same as that for the previous year, when it rose 3.3% on a 3.8% rise in production and a 0.5% increase in workhours.
During 1994, the chemical industry held its hourly wages somewhat in check; they rose 2.3% from the year before, lower than the 3.2% increase for productivity. This caused a further decline in unit labor costs. Unit labor costs for chemicals and allied products fell 0.9% in 1994 to an index of 101.1. This was the third straight year of decline in this measure. In 1993, unit labor costs declined 1.0% and the year before they fell 1.5%.
This is the normal pattern for a recovery, with both productivity increases and unit labor cost declines moderating as the recovery ages.
The increase in chemical productivity and decline in unit labor costs were not much different from those in the overall manufacturing industry segment. Total manufacturing production increased a much greater 6.0%, but workhours also rose 2.6% - much faster than for chemicals. Thus, productivity for this broad segment of the economy increased 3.3% to an index of 121.5, almost the same as chemicals' 3.2% increase.
Over the past 10 years, the chemical industry has lagged the all manufacturing category in productivity growth, at an average annual rate of 2.9%, compared with 3.3% for the broad manufacturing category.
And unit labor costs for all manufacturing fell 0.6%, less than for chemicals and allied products, as hourly wages increased faster. Wages were up 2.7% for all manufacturing, compared with 2.3% for chemicals.
Over the past decade, the unit labor cost index for chemicals and allied products has increased at an average annual rate of 0.3%, while the same measure for all manufacturing has declined 0.6% per year.
Unfortunately, productivity measures do not tell the entire employment story. The standard productivity measures used by economists and the government tend to consider the productivity only of factories and other production facilities. As such, it is almost axiomatic that as production increases, the number of production workers and the aggregate hours that they work also will increase. Productivity improvements, therefore, tend largely to come from process improvements. In the chemical industry, this may mean improved catalysts, better process control systems, or other changes that will cut the number of workers needed in an industry that already is not largely labor intensive.
Thus, in an industry such as chemicals that lost 25,000 employees - mostly white collar - last year, the standard productivity data do not tell the whole story of the effect of employment on the bottom line. A total productivity measure that would include all employees is impossible to derive from government data. However, a very gross measurement would be output per total employment or the index for production divided by an index for total employment.
For the chemical industry in 1994, this calculation would provide an index of 120.7, up 6.7%, or more than twice the productivity increase of 3.2%. In 1993, the increase would have been 4.3%.
For all manufacturing, output per employee increased 5.7% to an index of 125.9 in 1994 and was up 4.8% the year before.
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