Worker productivity manages small increase while wages soar

WASHINGTON — The efficiency of workers rose at a modest pace in the final three months of last year, far below the gain originally estimated, while worker wages and benefits soared.

The Labor Department reported Tuesday that productivity, the amount of output per hour of work, rose at an annual rate of 1.6 percent in the October-December period last year, about half of the 3 percent increase the government initially estimated a month ago.

The report showed that labor costs for each unit of output soared by 6.6 percent, far higher than the 1.7 percent increase initially reported. The combination of lower productivity and higher wages, if sustained, would raise alarm bells at the Federal Reserve about inflation.

The 6.6 percent surge in labor costs was far higher than the 3.2 percent rise that Wall Street had been expecting while the 1.6 productivity increase was in line with expectations.

The big revision in productivity reflected the big downward revision announced last week in total economic growth, as measured by the gross domestic product. The GDP expanded at a sluggish 2.2 percent annual rate from October through December, not the 3.5 percent growth rate originally reported.

With less output and the number of hours worked remaining the same, productivity for the quarter looked worse. The drop in output also meant that unit labor costs were higher.

It was the biggest quarterly increase in labor costs since a 9.1 percent surge in the first three months of 2006. Both gains were attributed in large part to big bonuses paid to high-income workers.

The Federal Reserve is closely monitoring productivity and labor costs to make sure that inflation pressures do not begin rising on a sustained basis.

Productivity is the key element needed for rising living standards. It allows businesses to pay workers with the wage gains financed by the increased output. Without productivity gains, businesses often have to resort to boosting the cost of their products to finance wage gains, a process that increases inflation.

Beginning in 1973, productivity slowed dramatically as the country went through a period of high inflation, triggered by a series of oil shocks.

However, beginning in 1995, productivity started to show much better gains as the economy benefited from the revolution in information technology.

For the year, productivity rose by 1.6 percent in 2006, the slowest annual increase in nine years.