Productivity slows while wages post second large increase

Wednesday, September 6th 2006, 8:32 am
By: News On 6

WASHINGTON (AP) _ The productivity of American workers slowed in the spring while wage pressures increased.

The Labor Department said that productivity, the amount of output per hour of work, increased at an annual rate of 1.6 percent in the April-June quarter, was slightly better than the 1.1 percent increase estimated a month ago but down from a 4.3 percent growth rate in the January-March period.

Wages registered a second sizable increase, rising at an annual rate of 4.9 percent in the second quarter, up from an initial estimate of a 4.2 percent increase _ good news for workers, but the kind of development that leads the Federal Reserve Board and economists to worry about inflation.

The second quarter increase followed an even larger 9 percent surge in labor costs in the first three months of the year, which was the biggest quarterly increase in nearly six years.

The first quarter figure was up sharply from a previous estimate that labor costs were rising at a much more moderate 2.5 percent rate in the first quarter. Labor Department analysts said the increase reflected more complete wage data.

While rising wages and benefits help workers, economists see the combination of slowing productivity and rising wage costs as a recipe for unwanted inflationary pressures.

Productivity is the key factor determining rising living standards. Strong growth in output allows businesses to pay their workers more without having to raise the cost of their products, which fuels inflation. But the current data raise concerns because they show wage pressures rising as productivity growth slows.

The Fed often has cited rising productivity as a reason to believe that inflation is not getting out of control.

Fed policymakers last month took a break after two years of 17 consecutive interest rate increases, sending a signal that they may have done enough to keep inflation at bay.

Most economists believe the Fed will remain on hold at their next meeting on Sept. 20. But some analysts believe the Fed will be forced to raise rates one or possibly two more times later this year in response to worsening news on inflation.

Productivity growth, which had been weak for two decades, began to rebound in the mid-1990s, reflecting the benefits produced by the spread of computers in the workforce.

In a speech last week, Federal Reserve Chairman Ben Bernanke took issue with economists who believe this productivity rebound will not be long-lasting.

Bernanke said he believed a case could be made that ``the strong productivity growth of the post-1995 era is likely to continue for some time.''