By Nathalie Voit

Quarterly productivity growth in the U.S. fell by the greatest amount since 1981, according to a report released Nov. 4 by the U.S. Bureau of Labor Statistics.

Nonfarm business employee output per hour declined 5.0 percent in the third quarter of the year, reflecting slower output despite an overall increase in hours. Labor Department figures reveal an output increase of 1.7 percent, while hours worked increased 7.0 percent. Meanwhile, nonfarm business sector productivity in the second quarter increased 2.4 percent. Most economists predicted a 3.1 percent decline in productivity for the third quarter, reported Bloomberg.

The decline in productivity is tied to increased worker compensation and pandemic-related supply chain snarls that have raised the costs of inputs for producers. A surge in COVID-19 cases in the third quarter also threatened output and limited the number of available workers.

According to the report, unit labor costs in the nonfarm business industry rose at an annualized rate of 8.3 percent in Q3, reflecting a 2.9 percent increase in hourly compensation and a 5.0 percent decline in productivity.

The labor shortage combined with increased labor costs for employers means firms often have to deal with the decline in productivity by investing in equipment and other costly high-tech tools, Bloomberg reported.

According to experts, the decline in productivity combined with rapid wage increases could prompt a wage-driven inflationary spiral. The wage-price spiral is threatening to offset the gains made by workers.

“People are concerned these high prices might last longer than the time frames that the Fed is mentioning,” said Mohit Bajaj, director of exchange-traded fund trading solutions at WallachBeth Capital.

The markets have already factored in inflation worries, according to Gennadiy Goldberg, a senior U.S. rates strategist at TD Securities.

“The market is starting to price in the potential for inflation to overshoot in the long run,” he said.