Productivity growth slows sharply while labor costs moderate

Tuesday, December 5th 2006, 8:44 am
By: News On 6

WASHINGTON (AP) _ Growth in worker productivity slowed sharply in the summer while wages and benefits rose at a rate that was far below a previous estimate.

Productivity, the key ingredient to rising living standards, edged up at an 0.2 percent annual rate in the July-September quarter. That was better than the zero change that was first reported, but it was below analysts' expectation for a slightly stronger 0.5 percent increase.

The costs of wages and benefits per unit of output increased at an annual rate of 2.3 percent in the summer, a much slower advance than the 3.8 percent rate of increase first reported a month ago. The slower gain in unit labor costs was likely to be greeted with relief at the Federal Reserve, which is concerned that wage pressures could boost inflation.

The 0.2 percent growth rate for productivity followed a much stronger 1.2 percent increase in the spring and was the weakest performance since a 0.1 percent decline in productivity growth in the final three months of last year, a time when the economy was being buffeted by the effects of a string of Gulf Coast hurricanes.

The 2.3 percent increase in labor costs followed a 2.4 percent plunge in the second quarter and a 9 percent surge in the first quarter this year. The quarterly changes have been skewed by the payment of large bonuses at the beginning of the year.

While rising wages are good news for workers, the increases could fuel unwanted inflation when productivity, the amount of output per hour of work, is slowing sharply.

Increases in productivity are the key factor pushing living standards higher because they mean that businesses can pay their workers more because of the increased output without having to raise the price of their products.

However, if labor costs outpace the rise in productivity, it means that businesses either have to raise the cost of their products, which can push inflation higher, or trim profit margins.

Democrats, who are pushing to boost the minimum wage, contend median incomes are growing weakly in this expansion because of faulty economic policies pursued by President Bush.

But administration economists say that wage gains are starting to accelerate as companies begin to pay higher wages by trimming their sizable profit margins. Such an outcome would mean that stronger wage growth could be financed without triggering higher inflation.

The Federal Reserve is closely watching for any signs that rising wages are starting to trigger increased inflation.

The central bank this summer halted a two-year campaign to raise interest rates as a way of slowing growth and many economists believe the Fed will keep interest rates unchanged at their last meeting of the year next week and well into 2007.