Productivity Gain Posts Best Numbers in Two Decades

WASHINGTON – Productivity, a key ingredient of the economy's long-term vitality, turned in its best performance in 19 years in the first quarter as hard-pressed companies produced more with fewer workers.

The Labor Department reported Friday that productivity — the amount of output per hour of work — grew at an annual rate of 8.4 percent in the January March period, matching many analysts' expectations.

The latest reading for the first-quarter, based on more complete data, shows that productivity gains were a bit weaker than the 8.6 percent rate of increase previously reported.

But the revised figure marked an improvement over the strong 5.5 percent productivity growth rate posted in the fourth quarter of 2001.

The big productivity gain recorded in the first quarter came at a price. Businesses, responding to the lingering effects of last year's recession, cut back on their payrolls. That caused the total number of hours worked to fall at a rate 2.1 percent. Output rose at a rate of 6.1 percent.

In the long run, productivity gains are good for workers, for the economy and for companies, whose profits took a hit during the slump.

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

The 8.4 percent rise in productivity in the first quarter marked the biggest increase since the second quarter of 1983.

The rise in productivity helped to push down unit labor costs, a gauge of inflation. Unit labor costs declined at an annual rate of 5.2 percent in the first quarter, a slightly smaller drop than the 5.4 percent repo+rted a month ago. Still, the latest number is an improvement over the 3.1 percent rate of decline in unit labor costs seen in the fourth quarter.

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

For all of 2001, productivity grew by 1.9 percent, a slowdown from the 3.3 percent gain posted in 2000, but still a respectable showing given the slump.

Federal Reserve Chairman Alan Greenspan has said he remains bullish about the long-term prospects of productivity growth.

He and other economists have suggested that the strong productivity gains seen in the late 1990s weren't just a passing fluke related to big investments by companies in productivity-enhancing computers and other high-tech equipment. Rather, those gains, may represent a more lasting change, in part reflecting fundamental management and structural changes at companies.