Productivity of U.S. Workers Slows

WASHINGTON – The productivity of U.S. workers rose in the April-June period at the slowest pace since last summer, the government reported Tuesday

The Labor Department (search) said the productivity of the work force rose at a 2.2 percent rate in the second quarter, down from a 3.2 percent rate of increase in the first three months of this year.

The rise in labor costs slowed in the second quarter to an annual rate of increase of 1.3 percent, far below the gains of the past nine months. That was only a modest improvement age-earners, but it also was a sign that inflation pressures remained in check.

Productivity, the amount of output per hour of work, has been surging in the years following the 2001 recession as American businesses laid off workers as a way to hold down costs. While the huge productivity gains of the past three years are coming to an end, analysts believe productivity will remain strong enough to keep inflation in check.

The 2.2 percent rise in productivity in the second quarter was the smallest gain since a tiny 1.3 percent increase in the July-September quarter of last year.

The 1.3 percent increase in unit labor costs was the smallest gain since unit labor costs actually fell by 0.8 percent in the spring of last year.

The new report should ease concerns at the Federal Reserve (search) that wage pressures are accelerating. Fed officials were meeting Tuesday and the expectation was that they would boost interest rates for a 10th consecutive time as they continue gradually raising interest rates to make sure that inflation remains contained.

With Tuesday's report, the Labor Department lowered its estimates for productivity growth in the past three years to reflect revisions in the gross domestic product announced late last month.

With those revisions, productivity grew by 3.4 percent last year rather than the previously reported 4 percent gain. Productivity growth in 2003 was lowered to 3.8 percent, instead of 4.3 percent, and 4 percent in 2002 rather than the previously reported 4.3 percent.

With slightly lower output per hour of work, unit labor costs were revised upward to 1.1 percent in 2004, instead of 0.8 percent; 0.2 percent in 2003 instead of a drop of 0.3 percent, and a drop of 0.3 percent in 2002 rather than a bigger decline of 0.8 percent, as was previously reported.

Even with the changes, productivity gains remained strong for the period coming out of the 2001 recession. For the period from 1973 through 1993, productivity increased at a lackluster average annual rate of just over 1 percent.

However, since that period, efficiency gains from computers and greater use of the Internet have contributed to a significant jump in worker output. Gains in productivity are the key factor in determining the level of living standards.

Higher productivity allows businesses to pay their employees more without raising prices for their products. That means the pay increases are not eroded by higher inflation.