WASHINGTON — American workers produced far more per hour last quarter than economists expected, and the cost of their labour per unit of output fell for the first time in more than a year, the U.S. Labor Department reported on Thursday, November 5 — a combination that strengthens the view among policymakers and economists that the jobs market itself is not fuelling inflation. Nonfarm productivity, which measures hourly output per worker, rose at a 3.6 percent annualized rate in the third quarter, the Bureau of Labor Statistics said, well above the 2.8 percent economists polled by Reuters had forecast, Reuters reported. The second quarter's growth was also revised up sharply, to 2.1 percent from the 1.4 percent first reported.
Source: Reuters (Lucia Mutikani), November 5, 2026 — reporting U.S. Labor Department / BLS data
The companion number matters even more for prices. Unit labor costs — the price of labour for each single unit of output — fell at a 0.7 percent rate in the third quarter, the first decline since the second quarter of 2025, after rising at an upwardly revised 1.9 percent pace in the second quarter. Economists had expected labour costs to rise 0.6 percent. Measured over a full year, unit labor costs were still up 2.4 percent, and productivity was up 2.1 percent from a year earlier — strong enough, economists say, for employers to pay more without having to pass the whole increase on in prices.
What these two numbers actually mean
Productivity is the economy's output divided by the hours worked to produce it. When it rises quickly, each hour of work creates more goods and services, so a business can raise pay, hold prices, or widen its margin — or some of each — instead of facing a straight choice between squeezing workers and charging customers more. Unit labor costs are the other side of the same coin: they track what employers pay in labour for each unit they produce. A fall in unit labor costs while productivity surges is exactly the pattern central bankers want to see, because it means wage growth is being earned by efficiency rather than feeding straight into inflation. The figures followed data last week showing a moderate increase in the Employment Cost Index, the broadest measure of labour costs, in the third quarter — one more reason policymakers and economists argue the jobs market is not a source of inflation, Reuters reported.
There is a harder edge in the same release for workers themselves: the data also showed workers' share of economic output falling to new lows. In plain terms, the economy's efficiency gains are real, but the slice of each dollar of output going to the people doing the work shrank again. Hourly compensation in the nonfarm business sector rose 2.9 percent in the quarter on the BLS measure — slower than output per hour — which is why purchasing-power pressure persists for many households even as the headline productivity number looks strong, a tension that runs through this week's jobs data ahead of Friday's payrolls report.
Is this the AI boom arriving — or the pandemic's long shadow?
Economists and policymakers have been hoping that an artificial-intelligence spending blitz will translate into significant productivity gains, Reuters noted, but the economists quoted on Thursday were cautious about crediting AI yet. “AI has yet to make a noticeable contribution. Productivity gains have been fairly consistent over the past several years,” said Stephen Stanley, chief U.S. economist at Santander US Capital Markets. “What we have seen is a transformation of the economy that came out of the trauma of the pandemic. Businesses had to figure out new ways to operate during the pandemic and many of their improvisations yielded lasting efficiency improvements.” Productivity is also volatile quarter to quarter, which is why the year-over-year figure — up 2.1 percent — is the steadier guide.
The U.S. central bank last week left its benchmark overnight interest rate in the 3.75%–4.00% range while acknowledging that inflation “remains elevated,” and economists expect the Fed to raise borrowing costs in December, with price pressure stemming from the U.S.-Israeli war with Iran in the background. Strong productivity with falling unit labor costs gives the Fed room to focus on that energy-driven inflation instead of wages. “The Fed will take some comfort from continued solid productivity gains and subdued unit labor costs, though any evidence that the job market is starting to tighten would weigh toward additional rate hikes,” said Sal Guatieri, a senior economist at BMO Capital Markets.
A tight labour market that is barely hiring
Thursday's productivity release landed in a labour market that looks tight on layoffs and frozen on hiring at the same time. The government reported this week that there were 1.06 open jobs for every unemployed person in September, up from 1.02 in August. A separate report from outplacement firm Challenger, Gray and Christmas showed U.S.-based employers announced 43,994 job cuts in October — up 2 percent from September but down 71 percent from October 2025, and the lowest for any October since 2023 — while announced hiring plans jumped 57 percent from a year earlier to 444,692, the highest for any October since 2009, likely mostly seasonal jobs. “Employers are holding on to the workers they have heading into the holidays, and the hiring they are announcing is largely short-term, seasonal work,” said Andy Challenger, the firm's chief revenue officer. “Companies want the flexibility to meet holiday demand without adding permanent headcount.” The flip side, Reuters reported, is that some unemployed people are experiencing long periods of joblessness, and continuing benefit claims rose to 1.718 million in the week ended October 24.
Some economists also read the week's very low layoff numbers differently: as partly a function of a smaller labour force amid the immigration crackdown, rather than purely fewer job cuts — a reading with direct consequences for immigrant and diaspora workers, including Punjabi truck drivers, warehouse staff and small-business employees, whose hiring pipelines run through exactly the sectors where workforce growth has slowed. Others believe the labour market could be tightening again. Both interpretations will be tested within 24 hours.
What happens next
The claims and productivity reports have no bearing on the government's closely watched employment report for October, due Friday, November 6, because they fall outside its survey period — but that report is now the week's main event. A Reuters survey of economists expects nonfarm payrolls to have increased by 65,000 jobs in October after rising 29,000 in September, with the unemployment rate forecast unchanged at 4.2 percent; the Chicago Fed is projecting the jobless rate at 4.14 percent, which would round down to 4.1 percent. After that comes the Federal Reserve's December meeting, where Thursday's productivity comfort will be weighed against an inflation picture the Fed itself calls elevated. On Thursday, U.S. stocks were lower, the dollar was steady against a basket of currencies, and U.S. Treasury yields fell.
What is solid
- BLS reported Q3 2026 nonfarm productivity up 3.6% annualized (forecast 2.8%), with Q2 revised up to 2.1% from 1.4%; productivity was up 2.1% year over year.
- Unit labor costs fell 0.7% in Q3 — the first decline since Q2 2025 — against a forecast rise of 0.6%; they were up 2.4% year over year.
- The Federal Reserve held its benchmark rate at 3.75%–4.00% last week, called inflation elevated, and economists expect a December increase.
- Friday's October payrolls report is expected to show +65,000 jobs with unemployment at 4.2% (Reuters survey); the Chicago Fed projects 4.14%.
What is only claimed
- Whether AI investment is driving the productivity gains is disputed: Santander's Stephen Stanley says AI has yet to make a noticeable contribution and credits lasting pandemic-era changes instead.
- Economists disagree on the week's low layoff figures: some see a tightening labour market, others see a smaller labour force amid the immigration crackdown flattering the numbers.