Productivity Up Scant 0.1%; Labor Cost Soars

From Associated Press

American workers’ productivity rose a barely perceptible 0.1% from October through December while unit labor costs, a major inflation measure for business, shot up at an annual rate of 5.6%, the government reported Tuesday.

The latest news from the Labor Department confirmed an initial report by the department a month ago showing that productivity, or output per hour of work, turned sluggish in the final three months of the year while inflationary pressures intensified.

The 5.6% rise in unit labor costs was almost double the 3.7% rate of increase in the third quarter. Unit labor costs reflect changes in hourly compensation as well as changes in productivity.

Federal Reserve Chairman Alan Greenspan last week cited labor costs as one of the factors behind the central bank’s recent decision to push interest rates higher in an effort to fight inflation.


Analysts said Tuesday’s report, which did not revise the unit labor costs from the initial estimate, would likely add to the central bank’s resolve to keep pushing interest rates higher, especially if the report on February unemployment, to be released on Friday, comes in as strong as expected.

Strong Demand for Workers

With demand for workers pushing up against tight labor markets and high factory operating rates, economists are worried that resulting pressures are starting to be seen in rising wage demands by workers and product-price increases on the part of businesses.

“Almost any reasonable person has to be scared about inflation right now,” said David Wyss, an economist with Data Resources Inc. of Lexington, Mass. “There is clear evidence that compensation costs are accelerating.”


The fear is that if wage demands begin chasing rising consumer prices, the country could be plunged back into a wage-price spiral similar to the one in the 1970s that then-Federal Reserve Chairman Paul A. Volcker fought with the steep 1981-82 recession.

The 5.6% rate of increase for unit labor costs in the fourth quarter reflected a 5.6% rise in hourly compensation, which includes wages and salaries as well as fringe benefits.

In the final six months of the year, hourly compensation was rising at an annual rate of 5.7%, a sharp acceleration from an annual rate of 3.9% in the first six months of 1988.

Analysts said most of the increase in the final half of the year reflected rising health insurance costs.