The productivity of American workers, the critical component for rising living standards, increased by 4.1 percent in 2004, capping a remarkable three-year period in which worker efficiency climbed at the fastest pace in a half century.

However, the Labor Department (search) reported Thursday that productivity for the final three months of the year was up at an annual rate of just 0.8 percent, which was the slowest quarterly increase in almost three years.

The rapid gains in productivity began slowing in the July-September quarter when productivity rose by just 1.8 percent after increases at rates of 3.7 percent in the first quarter and 3.9 percent in the second quarter last year.

Productivity, the amount of output produced for each hour of work, is the key factor in boosting living standards because it allows companies to pay their workers more based on their increased efficiency without having to resort to raising the price of their products, which would increase inflation.

Productivity rose by 4.4 percent in both 2003 and 2004. When combined with the 4.1 percent increase last year, the 4.3 percent average gain for those three years was the strongest burst in productivity since 1948 to 1951.

However, the downside of that increased efficiency is that companies, by getting more output from their existing work force, are able to avoid hiring new workers.

That is what occurred during the recession year of 2001 and the following two years in which job losses mounted as companies, pressed by increased global competition, strove to get increased production from slimmer work forces.

The strong productivity gains have kept the lid on inflation, but now with productivity slowing, some analysts are concerned that the Federal Reserve will abandon its gradual approach to raising interest rates should wage pressures begin to mount.