Productivity Drops 2.7%, Worst Since ’81 : 1st Quarter Performance Plunges as Labor Costs Rise 7%, Put ‘Squeeze on Profits’

American workers’ productivity plunged 2.7% in the first three months of the year for the worst performance since 1981, the government said today.

The drop in non-farm productivity--defined as output per hour of work--was the poorest showing since productivity fell 5.5% in the fourth quarter of 1981, the Labor Department said.

Today’s report, which provided revised figures on the first quarter of 1990, showed the nation’s lagging productivity was far worse than earlier reported. Original data showed productivity falling 1%.

Private analysts were disturbed by the drop in productivity.

“The standard of living of all Americans is limited by how much we can produce. The first quarter is a very dismal statement on that score,” said Allen Sinai, chief economist at the Boston Co.

Sinai said soaring unit labor costs were also dangerous because they were putting a “squeeze on profits.”

“Businesses can’t keep on employing people at those costs with so little production,” Sinai said.

Meanwhile, unit labor costs, a key gauge of future price inflation, sped up 7% for the January-March figure, compared with a 4.5% increase during all of 1989. Original data had unit labor costs rising 4.9% so far this year.

Hourly labor costs--a major inflation measure for businesses--rose at an annual rate of 4.1% in the first quarter of 1990. Those costs increased by 5.5% for all of 1989.

The report provided one bit of good news: Productivity in the manufacturing sector climbed 4.9% so far this year, a huge improvement over the 2% increase during all of 1989. Unit labor costs in that sector dropped 1.3%, compared with the 2.2% increase during all of last year.

Total business productivity, including farming, fell at 2.1% for the first quarter compared with a 1.1% gain for all of 1989.

Since 1982, productivity growth has averaged 1.8% a year. While a slight improvement over the 1.2% average growth rate in the 1970s, it was still far below the 3.3% rate of increase posted in the two decades following World War II. American workers enjoyed healthy wage gains and a rising standard of living during those decades.

Increasing productivity is considered basic to boosting living standards because it allows businesses to pay workers more as their output rises without risking higher inflation.

During all of last year, productivity rose just 0.9%, the poorest showing since the 1981-82 recession.

Today’s report showed that output in the non-farm sector rose 1% during the first quarter of 1990, well below the 3.9% increase in the number of hours worked.