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Worker Output Gains, Productivity Slips

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March 4, 2005 -- American workers were more efficient last quarter than experts anticipated, but productivity rates slipped, easing, but not eradicating, fears of inflation.

Between October and November of last year, total worker output in the non-farm business sector grew 2.1%, a much brisker pace than the initial estimation of 0.8%, the Labor Department reported yesterday.

Despite the Labor Department's upward revision, productivity, which measures the amount of output per worker, has been trending south overall. Productivity, grew 4.0% for the entire year last year as opposed to 4.5% in 2003.

Typically, productivity peaks between the end of a recession, when firms have purged all but their best workers, and the start of sustained economic expansion, when firms begin hiring to meet demand. As the country is currently in an expansionary period, a drop in productivity was expected. Also during periods of expansion, the supply of jobs is greater than the supply of skilled-workers, causing the cost of labor to increase. According to the Department of Labor, the unit cost of labor increased 1.3%.

The combination of workers producing less but earning higher wages often leads to inflation, as firms raise prices to cover the rising costs. A significant rise in prices has not kicked in yet, however, because of higher-than-normal profit margins, noted Mark Zandi, chief economist at Economy.com.

"Businesses would love to raise prices, but broadly speaking they will more likely eat the higher costs than pass them through," said Zandi.

Last updated: Mar 4, 2005




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