Productivity Growth Slows to 2.7% in the 4th Quarter

Worker productivity slowed sharply in the fourth quarter from the third quarter’s blistering rate, the government said Thursday, but the full-year figure still was far above the 1990s norm.

Productivity -- worker output per hour at nonfarm businesses -- grew at a seasonally adjusted annual rate of 2.7% in the fourth quarter, an expected tumble from the third quarter’s 20-year high of 9.5%, the Labor Department said.

For all of 2003, productivity rose 4.2%, after a 4.9% gain in 2002. The two years marked the best back-to-back improvement in more than 50 years.

During the 1949-51 period, productivity rose at an annual average of 4.6%, beating the 2001-03 average by 0.1-point.

The gains of the last two years contrast with annual productivity growth that never exceeded 2.8% from 1994 through 2000.

Wells Fargo economist Sung Won Sohn cited two reasons companies have been able to significantly increase output while keeping a lid on hiring. One explanation stems from investment: Firms finally are reaping the benefits of technology installed in recent years. The other reason arises out of competition: Companies are under great pressure to be inventive and cut costs.

“They have to do this, or they’re dead,” Sohn said. “They’re forcing employees to work harder, smarter.”

Because there are limits to just how much juice can be squeezed out of current employees, analysts are hopeful that continued productivity growth will finally result in a long-expected increase in hiring.

Yale economist Ray Fair expects employment growth of about 2% this year, which would produce an unemployment rate of about 5.4% (the rate for December was 5.7%) and output growth of about 4%.

“The conventional wisdom is that labor demand will increase because output is going up,” Fair said. “Historically, that’s been the case.”

Fair, like several economists, is skeptical about some of the recent productivity numbers, particularly that sizzling third-quarter rate. “It doesn’t seem to me there’s this enormous sea change of behavior. There’s a serious question about the data reliability,” he said.

The productivity numbers depend on two sets of employment data -- the payroll survey of corporations and a separate household survey -- that are in disagreement for reasons that remain unclear.

The job numbers for January will be announced today. Lee Price, research director for the Economic Policy Institute, expects a modest increase in employment growth.

“A 2.7% productivity increase is not a reason to hire,” Price said. “These gains are not going to mean any jobs. And they’re certainly not going to mean any increased wages.”

The new Labor Department report made clear that increased productivity mostly was benefiting companies’ bottom lines, not workers’ pocketbooks.

Unit labor costs -- equal to hourly compensation divided by worker productivity -- fell 1.3% in the quarter. In the third quarter, labor costs sank 5.6%.

For the year, unit labor costs fell 1.2%. In 2002, they fell 2.5%. The government said that those decreases were the first annual drops since the early 1960s.