Worker productivity rose in the fourth quarter by the largest amount in more than a year as businesses cut workers' hours and eliminated jobs to cope with the ailing economy.

Productivity — the amount of output per hour of work — increased at an annual rate of 3.5 percent in the October-December quarter, a big improvement over the 1.1 percent growth rate in the previous quarter, the Labor Department reported Wednesday.

Businesses responded to slumping sales by sharply cutting back on their payrolls. That caused the total number of hours worked to drop at a faster pace than output, thus creating a rise in productivity.

Workers' hours fell at a 3.7 percent rate and output declined at a 0.4 percent rate in the fourth quarter. Companies have slashed thousands of jobs.

For all of 2001, productivity rose by 1.8 percent, the weakest showing since 1995, and a deceleration from the 3.3 percent increase posted in 2000. The slower productivity growth seen last year reflected the impact of the slumping economy.

In general, productivity tends to rise strongly when the economy is booming. Gains in productivity can become weak or productivity can fall when the economy slows or contracts.

The economy slipped into recession in March, but there have been signs recently of an economic rebound.

The rise in productivity in the fourth quarter helped to moderate unit labor costs, a gauge of inflation. Unit labor costs actually fell at an annual rate of 1.1 percent, after rising at a rate of 2.6 percent in the third quarter.

But for all of 2001, unit labor costs rose by 3.9 percent, the biggest gain since 1990. In 2000, unit labor costs increased by 3.1 percent.

In the long run, productivity gains are good for workers and for the economy, analysts say.

Gains in productivity allow companies to pay workers more without raising prices, which would eat up those wage gains, and permit the economy to grow faster without triggering inflation. If productivity falters, however, pressures for higher wages could force companies to raise prices, thus worsening inflation.

The 3.5 percent productivity growth rate in the fourth quarter marked the biggest increase since the second quarter of 2000 when productivity rose at a 6.7 percent rate.

Federal Reserve Chairman Alan Greenspan and his colleagues remain bullish about the long-term prospects of productivity growth, even though businesses have pared investment in computers and equipment.

"With the forces restraining the economy starting to diminish, and with the long-term prospects for productivity growth remaining favorable and monetary policy accommodative, the outlook for economic recovery has become more promising," Fed policy-makers said in a statement last week explaining why they decided to leave interest rates unchanged after ordering 11 cuts last year.

From 1973 to 1995, productivity averaged lackluster gains of just above one percent per year. But since 1995, increases have more than doubled.