Productivity Growth Slows; Labor Costs Up

Productivity growth slowed in the first three months of the year while labor costs, a closely watched gauge of inflation, accelerated, the government said today.

Productivity of the non-farm sector, which measures output per hour worked, rose at a 0.5% rate after gaining a revised 1.0% in the fourth quarter of 1988, the Labor Department said. It initially estimated the increase in the final three months of 1988 at 0.1%.

Output increased at a seasonally adjusted annual rate of 3.6% between January and March, while hours worked increased 3.1%.

Productivity, the key to rising living standards, is becoming increasingly important as the economy approaches full employment, economists said. With the labor force expanding by about 1.5% a year, economic growth will not reach the Bush Administration’s 3% goal unless productivity rises the same amount, they said.

Shortfalls in growth because of flagging productivity would in turn have widespread consequences for the federal budget.

Non-farm productivity increased by 1.5% in 1988 after a rise of 0.8% in 1987.

But Aubrey Zaffuto, an economist with IBJ Schroder Bank & Trust Co., said it will be difficult to sustain last year’s productivity growth without much greater investment in labor-saving machinery. “We would have to make enormous efforts,” she said.

Apart from the slowdown in productivity growth, Zaffuto said, the acceleration in unit labor costs, to a 5.2% annual rate from a downward revised 4.1% in the fourth quarter of 1988, was also worrisome.