Productivity Grows at 2.1 Percent Rate

The productivity of U.S. workers rose in the second quarter as businesses laid off workers and decreased hours in response to the economic slowdown.

However, the increase was less impressive than originally thought, the Labor Department said on Wednesday.

Worker productivity — the amount of output per hour of work — rose at an annual rate of 2.1 percent in the April-June quarter, according to revised figures released Wednesday in Washington.

The new estimate is slower than the 2.5 percent growth rate the department reported a month ago, but largely matched many analysts' expectations. It was the best showing since productivity rose at a rate of 2.3 percent in the fourth quarter of last year.

Productivity rose in the second quarter as businesses cut workers' hours at a 2.6 percent rate, the biggest drop since the first quarter of 1991. Output fell at a rate of 0.5 percent, the first decline since the first quarter of 1993 when the country was emerging out of its last recession.

In response to sagging demand, businesses have laid off thousands of workers, with the manufacturing industry, hardest hit by the slowdown, cutting payrolls by more than 800,000 in the 12 months ending in July.

Economists were expecting a downward revision to productivity because the economy also had grown far more slowly in the second quarter than the government had initially thought. Last week, the government reported the economy grew at its slowest pace in eight years, barely expanding at a 0.2 percent rate, versus the 0.7 percent growth rate originally reported.

Gains in productivity are the key to rising living standards because they allow wages to increase without triggering inflation that would eat up those wage gains. If productivity falters, however, pressures for higher wages could force companies to raise prices, thus worsening inflation.

Even with the downward revision, productivity's 2.1 percent growth rate in the second quarter was still quite healthy and marked a big improvement over the first quarter's meager 0.1 percent rate of advance.

The lower productivity estimate resulted in unit labor costs being revised upward. Unit labor costs, a gauge of inflation pressures, rose at a 2.7 percent rate in the second quarter. That's higher than the 2.1 percent rate previously reported, but was a moderation from a 5.0 percent rate in the first quarter. Still, even with the upward revision, unit labor costs in the second quarter posted their smallest increase in a year.

Federal Reserve Chairman Alan Greenspan has said he remains bullish about the long-term prospects of productivity growth, even though businesses, responding to the slowdown, have pared back investment in computers and other productivity-enhancing equipment.

From 1973 to 1995, productivity averaged lackluster gains of just above 1 percent per year. But since 1995, increases have more than doubled.

Economists continue to debate whether the healthy productivity gains seen after 1995 represent a "new economy," meaning a lasting, structural change, driven in large part by businesses making massive investments in high-tech equipment. Conversely, they question whether the gains were simply the fruit of economic boom times in which companies pushed workers more to meet rapidly rising demand.

Reuters and the Associated Press contributed to this report.