Productivity Posts Big Decline

LA TIMES - 06/05/001

WASHINGTON--American workers' productivity, a key measure of rising living standards, fell at an annual rate of 1.2 percent in the first quarter, far weaker than the government previously estimated. It was the biggest drop in eight years.

The downward revision in productivity -the amount of output per hour of work -released by the Labor Department Tuesday reflected the weakened state of the U.S. economy. The government had previously estimated that productivity in the January-March quarter dipped at a rate of 0.1 percent.

The 1.2 percent decline, bigger than analysts predicted, was the largest since the first quarter of 1993, when productivity fell at a rate of 5 percent.

The drop boosted unit labor costs, a gauge of inflation pressures, at an annual rate of 6.3 percent in the first quarter, the biggest increase since the fourth quarter of 1990 and faster than many analysts expected, according to revised figures. That government previously estimated labor costs rose at a 5.2 percent rate in the first quarter.

The lower productivity figure is a byproduct of a slowing economy, which grew at an annual rate of 1.3 percent in the first quarter, far more slowly than the 2 percent rate the government previously estimated.

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.

In the first quarter, employees' output went up but their hours worked grew twice as fast, leading to a decline in productivity.

In general, productivity tends to rise strongly when the economy is booming, but gains in productivity can become very weak or fall when the economy slows as it did beginning in the second half of last year.

But until the first quarter, productivity grew solidly -albeit at a slow pace -during the economic slowdown, rising at rate of 3 percent and 2 percent in the third and fourth quarters, respectively. That bolstered the view among some economists that strong productivity gains of recent years are long lasting, rather than simply the fruit of a booming economy.

Some economists say a recurrence of the weak first-quarter productivity could call into question the theory that the sizable pickup in productivity growth over the last several years represents a lasting, structural change in the economy.

Federal Reserve Chairman Alan Greenspan predicted productivity would weaken as the economy slowed, but suggested the lull would be only temporary. Greenspan has indicated that massive investments by businesses in computers and other productivity-enhancing equipment in recent years has permanently improved the outlook for productivity.

From 1973 through 1995, productivity averaged lackluster gains of just above 1 percent per year. But since 1995 increases have more than doubled, allowing companies to pay workers higher salaries without raising the prices of their products.

Even with the sharp rise in first-quarter unit labor costs, which followed a 4.5 percent rate of increase in the fourth quarter, many economists, including Greenspan, have said they don't believe inflation poses a risk to the economy. Analysts expect the economic slowdown will ease inflation pressures.

-- PHO (owennos@bigfoot.com), June 05, 2001