U.S. Productivity Surges as Businesses Shift from Cheap Labor to Investment
U.S. labor productivity accelerated sharply in the third quarter of 2025, growing at an annual rate of 4.9 percent, with workers contributing more to output per hour worked, the Bureau of Labor Statistics reported Thursday.
The figure far exceeded economists’ expectations of 3.6 percent and marked the strongest quarterly gain in two years. Combined with an upwardly revised 4.1% increase in the second quarter, this back-to-back performance suggests that U.S. companies are adapting to the tightening labor market by investing in efficiency rather than pursuing the low-cost labor strategies that have dominated much of the past two decades.
“We’re starting to see the effects of the president’s policies,” Joe Lavorgna, an adviser to the Treasury secretary, said in an interview with Breitbart News after the figures were released. “This data that we are seeing at the end of 2025 gives us strong momentum through 2026.”
Lavorgna argued that improving productivity would allow the Federal Reserve to cut interest rates more aggressively this year. “Trump’s productivity increase should allow interest rates to fall,” he said.
The data indicates a fundamental shift in business behavior. Businesses increased production by 5.4 percent while hours worked increased by only 0.5 percent, indicating that businesses were able to get more from existing workers rather than increasing their headcount or hours worked.
Unit labor costs – the amount companies pay workers to produce each unit of output – fell 1.9 percent in the third quarter. This is the first consecutive drop in these costs since 2019, even though hourly compensation increased by 2.9%.
The decline in unit costs has occurred because productivity gains have more than offset wage increases, a trend that reduces inflationary pressures on the economy. This contradicts claims by some economists that Trump’s immigration policies would create a wage-price spiral that would drive up inflation.
Over the past four quarters, productivity has increased by 1.9 percent while unit labor costs have increased by only 1.2 percent, well below the pace typically associated with problematic inflation.
It also indicates that tariff critics were wrong when they claimed the Trump administration’s trade policies would make the U.S. economy less efficient.
The shift from labor-intensive to productivity-oriented activities was even more pronounced in the manufacturing sector, where output increased by 2.6 percent while hours worked fell by 0.7 percent.
In the durable goods manufacturing sector, the trend was even more striking: production increased by 3.0 percent while hours worked decreased by 1.7 percent. This 4.7% productivity gain in durable goods suggests that companies are producing more with far fewer workers – an outcome that would be difficult without significant investment in automation, training or process improvement.
Total manufacturing productivity rose 2.3% from a year earlier, the largest four-quarter increase since the second quarter of 2021, when the economy was rebounding from the pandemic.
The BLS also revised its estimates for productivity growth throughout the current business cycle, which began in the fourth quarter of 2019. The new data shows that productivity grew at an annualized rate of 2.0 percent during this period, up from 1.8 percent previously reported.
This revision brings the current cycle’s performance closer to the long-term historical average of 2.1% since 1947, and significantly above the disappointing 1.5% rate that prevailed during the 2007-2019 cycle. This cycle has been characterized by high levels of offshoring, increased imports and immigration-led labor force growth.
This improvement suggests that the productivity slowdown that characterized much of the 2000s and 2010s may be ending.
The increase in productivity coincides with a period of limited labor supply following immigration policy reforms. Recent job opening data from the Labor Department showed that companies cut back on hiring in November, even as layoffs remained near historic lows, suggesting that companies are holding on to their existing workers while abandoning the search for new hires they can’t easily fill.
Hours worked across the entire nonfarm business sector rose just 0.9 percent over the past year, well below the pace seen during previous expansions, when businesses could more easily recruit workers.
This labor constraint appears to drive a return to productivity-enhancing capital investments. When companies can’t simply hire more workers at competitive wages, they are forced to invest in technology, equipment and training to enable existing employees to produce more.
Recent capital goods order data provide concrete evidence that companies are shifting resources from labor to equipment. New orders for core capital goods — non-defense orders excluding aircraft, a proxy for business investment — rose 3.1% in the year through October compared with the same period in 2024, according to Census Bureau data released in late December.
The acceleration of equipment orders extends to categories directly related to improved productivity. New orders for computers and electronic products increased 3.8% on the year, while orders for machinery increased 4.2% and orders for electrical equipment increased 4.9%.
The timeline suggests a clear causal chain: As labor markets tightened through 2024 and into 2025, companies accelerated orders for productivity-enhancing equipment. This equipment is now being installed and contributes to the productivity gains visible in the third quarter data.
This represents a reversal from the trend that dominated between approximately 2005 and 2019, when an abundance of immigrant labor and the threat of offshoring allowed businesses to keep productivity growth at historically low levels while relying on labor quantity rather than quality. During this period, average productivity growth of just 1.5 percent reflected minimal incentive to invest in efficiency while adding workers remained the easier route.
The BLS revised second-quarter productivity upward from the preliminary estimate of 3.3 percent to a final reading of 4.1 percent. Even more dramatically, second-quarter unit labor costs were revised downward from an increase of 1.0 percent to a decrease of 2.9 percent, a change of almost four percentage points that suggests the underlying trend is even stronger than initially reported.
The back-to-back strong quarters in mid-2025 follow a weak first quarter, when productivity fell 2.1% and unit labor costs jumped 7.3% at the end of the Biden administration. This volatility is typical of quarterly data, but the multi-quarter trend now clearly indicates a sustained acceleration in productivity.
Productivity gains have significant implications for the economy’s inflation outlook. The Federal Reserve closely monitors unit labor costs as an indicator of wage-related price pressures. With those costs now falling, the data eliminates a potential concern that could have complicated the Fed’s policy decisions.
The figures also suggest that the economy may be able to sustain higher levels of output growth without generating inflation, since businesses produce more with each hour of work rather than simply adding costly labor.
The government will release December employment data on Friday, providing additional information on whether labor market dynamics that are driving productivity gains continue into the final months of 2025.
