Productivity Rise Largest in a Year

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Worker productivity rose in the third quarter by the largest amount in more than a year as businesses, coping with the sour economy, slashed workers' hours at the fastest pace in a decade.

Productivity - the amount of output per hour of work - increased at an annual rate of 2.7 percent in the July-September quarter, up from a 2.2 percent growth rate in the second quarter, the Labor Department reported Wednesday.

The third quarter's performance was better than the 2 percent productivity gain many analysts were expecting and marked the biggest increase since the second quarter of 2000, when productivity soared by 6.3 percent.

Productivity rose in the third quarter as businesses cut workers' hours at a 3.6 percent rate, the largest drop in hours since the first quarter of 1991 when the country was in the depths of its last recession. Output declined at a rate of 1 percent, the biggest decrease since the first quarter of 1993.

In response to sagging sales, businesses have not only cut employees' hours but they have laid off hundreds of thousands of workers. A total of 415,000 jobs were eliminated in October, the biggest one-month drop in 21 years.

The rise in productivity came even as the economy has tanked.

Last week, the government reported the economy shrank at a 0.4 percent rate in the third quarter and many analysts predict an even bigger decline in the current fourth quarter. A common definition of recession is two consecutive quarters of falling economic output.

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 as it did in the third quarter.

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

The rise in productivity helped moderate unit labor costs, a gauge of inflation.

Unit labor costs in the third quarter rose at an annual rate of just 1.8 percent, down from a 2.6 percent rate of increase in the second quarter. The third-quarter increase was the smallest since the second quarter of 2000 and was a much better showing than the 2.5 percent rise many analysts were forecasting.

Federal Reserve Chairman Alan Greenspan and his colleagues remain 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.

Increased spending on security in the wake of the Sept. 11 terror attacks could ``restrain advances in productivity for a time,'' Fed policy-makers acknowledged in a statement Tuesday announcing their 10th interest rate cut this year. But ``the long-term prospects for productivity growth ... remain favorable,'' they added.

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.