THE ECONOMY : Analysts Call Leap in Labor Costs an Aberration

A gauge of wage inflation shot up at the fastest pace in three years during the first quarter, but private economists and the Clinton Administration insisted that the sharp increase was an aberration and not a signal of spiraling prices.

The Labor Department said Thursday that unit labor costs in the January-March quarter jumped at an annual rate of 5% over the last quarter of 1993, the steepest increase since a 6.1% surge in the final three months of 1990.

The report also suggests a dramatic slowing in non-farm productivity growth, up just 0.5% in the first quarter, compared to a 6.4% gain from October through December.

But economists said both figures overstate the situation.

The jump in labor costs--which account for two-thirds of the cost of a product--is an aberration, said Mark Zandi, an economist with Regional Financial Associates in West Chester, Pa.

“It’s not consistent with all the other information we have available to us,” he said. “Labor is still receiving relatively tame and modest increases in wages, salaries and benefits.”

Indeed, unit labor costs were up just 0.8% over the first quarter of 1993, suggesting that inflation should remain near current levels, said economist Bruce Steinberg of Merrill Lynch & Co. Consumer prices were rising at an annual rate of 2.5% in March, down from 2.7% in 1993.

Robert Wescott, an economist with the President’s Council of Economic Advisers, also said the report is misleading, noting that a separate measurement of labor costs was well-behaved during the first quarter.

In a report last week, the Labor Department said its employment cost index edged up just 0.7% in the first quarter, down from 0.8% in the fourth quarter and the smallest increase in 7 1/2 years.

“You have to put (unit labor costs) in context with the other data,” Wescott said. “This is one piece of information on the quarter that is not corroborated by other important indicators.”

Many analysts consider the index the more reliable of the two inflation gauges. They differ somewhat in the factors that are measured.

Elsewhere Thursday, the Labor Department said the number of Americans filing first-time claims for state unemployment benefits rose by 17,000 last week to 350,000. Analysts said the report suggests that job growth slowed in April to about 170,000, from 456,000 in March, which had the biggest jump in more than six years. The department releases the April employment report today.

In the productivity report, the Labor Department said first-quarter growth was the slowest since a 0.4% decline in the second quarter of last year. Productivity is defined as output per number of hours worked.

But Zandi contended this too was misleading.

“Despite the relatively slow growth in the first quarter, it’s more representative to look over last year, when there have been strong gains,” he said.

Growth in productivity reflects the nation’s living standards and the competitiveness of its products overseas. If it remains strong, inflationary pressures are less likely to develop.

Zandi attributed recent growth to corporate restructuring and downsizing and to major technical advances. He suggested that harsh winter weather may have played a significant role in the slowdown and said, “We may be in for a period of stronger productivity growth than we have seen over the past several years.”

However, other economists contend that recent productivity improvements were the result of the recession and recovery, in which companies worked their employees longer and harder instead of hiring more people.

As the economy improves, they say, businesses will begin adding to their payrolls and productivity growth will slow.

The report said output grew just 2.6% in the first quarter, down from the fourth quarter’s 8.9% advance. At the same time, the number of hours worked increased 2%, compared to 2.4% in the fourth quarter.