WASHINGTON, D.C. (AP) -- Productivity was increasing at the end of last year at three times the expected pace while labor costs slowed significantly, underscoring that a deepening recession has taken away the threat of inflation.
The Labor Department said Thursday that productivity rose at an annual rate of 3.2 percent in the final three months of last year, far above the 1.1 percent rise that economists had expected. The increase was double the 1.5 percent rise in productivity in the third quarter.
Meanwhile, unit labor costs edged up at a 1.8 percent annual rate in fourth quarter, far lower than the 2.9 percent rise that had been forecast. Labor costs had risen at a 2.6 percent rate in the third quarter.
The big jump in productivity occurred in a quarter when overall economic activity, as measured by the gross domestic product, plunged at an annual rate of 3.8 percent, the biggest drop in a 26 years.
Productivity, which is the amount of output per hour of work, was able to show a robust increase because the number of hours worked during the period plunged at a faster rate than output declined. That reflected the massive wave of layoffs that occurred during the quarter.
The slowdown in unit labor costs showed the downward pressure on wages and benefits that is occurring as the recession, already the longest in a quarter-century, deepens.
For the whole year, productivity rose by 2.8 percent, double the 1.4 percent rise in 2007 and the best showing since a similar 2.8 percent rise in 2004.
Unit labor costs slowed to a tiny increase of 0.5 percent, far below the 2.7 percent increase of 2007, and the smallest rise since 0.3 percent gain in 2003.
While rising wages and benefits are good for workers, if those gains outstrip increases in productivity it can create serious inflation problems as businesses are forced to boost the cost of their products to cover the higher wage demands.
If workers are more productive, though, businesses are able to increase their pay and cover the costs with the increased output of goods and services.
Before the financial crisis hit with ferocity last fall, the Federal Reserve had begun to worry that rising inflation could become a problem threatening the economy. However, since the financial crisis hit and economists confirmed that the country is in a prolonged recession, the Fed has switched from worrying about inflation to aggressively employing rate cuts and other tools to fight the recession.
The country has seen sizable layoffs during the current recession, which began in December 2007. A net total of about 2.6 million jobs were lost last year, the largest number since 1946, although the work force has grown significantly since then.
Sizable layoffs have persisted in the new year. On Wednesday, Time Warner Cable Inc. reported a massive fourth-quarter loss and said it plans to lay off 1,250 workers over the next few weeks, while Botox maker Allergan said it planned to lay off about 460 employees, or 5 percent of its work force.
Those layoff notices followed similar action Tuesday from PNC Financial Services Group, airplane maker Hawker Beechcraft Corp., Liz Claiborne Inc., King Pharmaceuticals Inc. and military contractor and aerospace company Rockwell Collins Inc.
(Copyright ©2009 by The Associated Press. All Rights Reserved.)
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