Productivity Increases Nicely, but Wages Don’t : Economy: Output per hour jumps 2.3% in the second quarter. Pay edges up only 0.4% in the first half of 1992.

The productivity of American businesses rose sharply during the second quarter, while labor costs edged up in the first half of 1992 at the slowest pace in 17 years, the Labor Department reported Tuesday.

Non-farm productivity, defined as output per hour of work, rose at a projected annual rate of 2.3% during the three months ended June 30, after a revised increase of 3.8% in the first quarter of the year, the government said.

American workers, however, failed to reap the benefits of higher productivity, the government indicated. Non-farm hourly wages adjusted for inflation fell 0.7% after rising 1.1% in the first quarter of this year. The combined gain of 0.4% was the smallest since 1975.

Total hours worked declined 0.3% in the last quarter, and unit labor costs rose a scant 0.3%, the Labor Department said.

Economists said the productivity gains and the extremely low increases in unit labor costs should result in improved corporate profit and continued low inflation. But the statistics reflect the sluggishness of the economy, with its widespread layoffs, unemployment that has risen to 7.7% and severe downward pressure on wages.

The rise in productivity, which makes American-made goods more competitive in foreign markets, stems from companies cutting costs and using their work forces more efficiently instead of hiring additional workers.

“For the short run, it’s not a good sign,” said Mark Lasky, an economist with DRI/McGraw Hill. “It means that companies are able to produce more output but not hire more workers. There’s an income shift going on from workers to profits.”

This is bad news for the recovery because the money is not being put back into the economy, he said. “If the money were going to consumers, they would spend it” and help fuel the recovery, Lasky said.

But economists agree that, in the long run, higher productivity will help fuel the recovery.

“This will pave the way for companies to again start to increase hiring down the road,” said Lynn Reaser, chief economist at First Interstate Bancorp in Los Angeles. “Output can only be increased with the existing work force for a limited amount of time.”

Reaser said the higher rate of productivity is the result of a “correction process” now underway: Corporations are cutting back both excess staff and excess debt they acquired during the 1980s. The next step, she said, is to start hiring again.

“The improvement in productivity is characteristic of the early stages of a recovery,” she said. “The next stage will be some improvement in employment made possible by increased productivity.” Reaser said increased hiring should start in the next 12 to 18 months, although it is likely to be “gradual.”

Lasky agreed that the next logical step for businesses is to start expanding their work forces. “Workers’ wages do eventually reflect some of the benefit of their higher productivity,” he said.

Also on the positive side, economists say, is the fact that low costs help keep inflation down.

Productivity in the manufacturing sector rose 4.7% in the second quarter after decreasing 0.8% in the first. It rose 8.2% at manufacturers of durable goods such as automobiles, farm equipment and aerospace equipment, all industries hit hard by the recession. Analysts attributed the trend to industrywide reductions in worker hours.

The good news, they agree, is that increased productivity per worker will lead to more investment, and it will make American companies more competitive in the world market.

“Once the recovery starts to gain momentum, sometime in 1993, it could surprise us by being stronger than people now believe,” Reaser said.

Productivity

Non-farm business productivity, percent change from previous quarter at annual rate, seasonally adjusted.

2nd quarter, 1992: 2.3% (preliminary)

Source: Labor Department