The Productivity Surge and What It Means for Workers

The latest productivity data shows American businesses are getting more efficient. Output per worker increased in the third quarter, annual revisions pushed prior gains higher, and unit labor costs are falling. For those watching inflation, this is welcome news. For workers navigating a cooling labor market, the picture is more complicated.

Q3 Surge and Upward Revisions 

Productivity growth jumped 4.9% on an annualized basis in Q3, driven by a stark divergence: output surged 5.4% while hours worked rose just 0.5%. Annual revisions released alongside the data were generally positive dating back to 2020, with Q2’s initial estimate of 3.3% revised up to 4.1%. 

Since the end of 2019, productivity has risen at a 2.0% annual rate, faster than the 1.5% average recorded between 2007 and 2019. Manufacturing showed even stronger gains, with productivity up 3.3% even as hours worked in the sector declined 0.7%.

The Jobless Expansion 

Doing more with less has a concrete meaning in 2025: employers added just 584,000 jobs for the year, compared with 2 million in 2024. From May through December, hiring averaged only 12,000 jobs per month, down from 123,000 in the first four months. The hiring rate fell to 3.2%, matching its lowest level in more than a decade outside of the pandemic. 

The quits rate tells a similar story. At 2%, it has been essentially flat for more than a year and remains below pre-pandemic levels. When fewer people quit, employers don’t need to raise wages as much to retain talent. When fewer companies hire, workers lose the outside offers that give them leverage. Economist Kathryn Anne Edwards put it simply: without that outside offer, “not only can you not leave, but you can’t bargain for higher wages as easily.”

The AI Question 

The productivity surge coincides with widespread AI deployment, though the precise relationship remains unclear. According to Challenger, Gray & Christmas, nearly 55,000 U.S. layoffs in 2025 explicitly cited AI as a factor. Salesforce reduced its customer support workforce by 4,000, with CEO Marc Benioff stating AI now handles up to half of the company’s work. 

The pattern is not simply replacing workers with technology. Amazon announced 14,000 corporate layoffs this year, with HR chief Beth Galetti framing the cuts as necessary to “move as quickly as possible” in an AI-driven environment. The company is flattening its management structure, cutting managerial roles by roughly 13% and HR staff by up to 15%, while continuing to hire in logistics, warehousing, and technical areas. 

An EY survey found 96% of organizations investing in AI are experiencing productivity gains, with 57% describing those gains as significant. Whether AI is driving the current productivity cycle or firms are simply running leaner in an uncertain environment is difficult to disentangle.

Falling Unit Labor Costs 

Productivity connects directly to inflation through unit labor costs. On a quarterly basis, unit labor costs fell 0.2% in Q3, the second consecutive decline after eight straight quarters of increases. On an annual basis, unit labor costs rose just 1.2% compared to a year ago, the weakest year-over-year increase since Q3 of 2023. 

For the Federal Reserve, this trend helps ease concerns of inflation. Falling unit labor costs suggest the wage-sensitive component of inflation, particularly in services, should remain moderate.

Looking Ahead

Strong productivity growth is good for the economy in aggregate. It remains the primary driver of rising living standards over time. But the gains may not be evenly distributed. Early data suggests younger workers roles are facing a more difficult job market than earlier generations. 

The question going forward is whether productivity gains continue to come primarily through labor substitution, or whether new roles emerge to absorb displaced workers. Goldman Sachs Research suggests the labor market impact may be “transitory” as new opportunities eventually materialize. For now, the data points to an economy that has learned to operate leaner, with implications that will take time to fully understand.