WORKER productivity hits highest rate in a year in second quarter

Wednesday, August 8th 2001, 12:00 am
By: News On 6

WASHINGTON (AP) _ Worker productivity, a key measure of living standards, had its best showing in a year in the second quarter.

But revisions to Labor Department records for the past five years revealed growth wasn't as dazzling as previously thought, rekindling the debate over whether the country had entered into a golden era of productivity in the late 1990s.

Worker productivity _ the amount of output per hour of work _ rose at an annual rate of 2.5 percent in the April-June quarter, the department reported Tuesday. A revision turned a negative first-quarter figure into a tiny 0.1 percent growth rate.

One reason productivity grew so much in the second quarter is that businesses, trying to cope with the slumping economy, sharply cut workers' hours. Workers' hours fell at a 2.4 percent rate, the largest decline in hours since the first quarter of 1991, while output edged up at a 0.1 percent rate, thus producing the rise in productivity.

On Wall Street, the Dow Jones industrial average rose 57 points to close at 10,459.

Separately, the Federal Reserve reported that consumer credit declined at a seasonally adjusted annual rate of 1.2 percent in June, the first drop in nearly four years.

The bigger-than-expected quarterly advance in productivity was the largest increase since a 6.3 percent growth rate registered in the second quarter of last year.

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.

The rise in productivity helped to moderate labor costs. Unit labor costs, a gauge of inflation pressures, rose at a 2.1 percent rate in the second quarter, down from a 5.0 percent rate in the first quarter.

The annual revisions, meanwhile, showed that from 1996 through 2000, productivity growth averaged 2.5 percent, compared with the 2.8 percent average originally reported. Annual revisions are based on more accurate data.

That reignited the debate among some economists over 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.

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

``The revisions put a dent in the new era thesis,'' said David Orr, chief economist at First Union.

Dean Baker, an economist and co-director of the Center for Economic and Policy Research, a think tank, agreed. ``The 'new economy' story becomes somewhat more tenuous. Clearly, productivity is looking better than it did in the mid-1970s to 1995, but we are not back to the rates of the productivity boom in the 1960s.''

But Merrill Lynch's chief economist, Bruce Steinberg, had a different view. ``The rising productivity trends of the late 1990s remain very much in place,'' he said. ``Those who argue that the revised data deny the productivity miracle are just being silly.''

Federal Reserve Chairman Alan Greenspan told Congress last month that he remains bullish about the long-term prospects of productivity growth, even though businesses, responding to the yearlong economic slowdown, have pared back investment in computers and other productivity-enhancing equipment.

``There is still, in my judgment, ample evidence that we are experiencing only a pause in the investment in a broad set of innovations that has elevated the underlying growth in productivity to a rate significantly above that of the two decades preceding 1995,'' Greenspan said. ``By all evidence we are not yet dealing with maturing technologies that, after having sparkled for a half decade, are now in the process of fizzling out.''

The biggest annual revision was for 2000, which showed productivity growing by 3.0 percent, rather than 4.3 percent. The lower estimate in part reflected a recent downward revision by the government for output, as measured by the gross domestic product, from 5 percent to 4.1 percent for 2000.