Productivity, Labor Costs Rise in U.S.

U.S. workers raised their productivity in the opening quarter of this year, according to government data released Thursday. Their compensation went up briskly too.

From a worker perspective, more generous compensation -- wages and benefits -- is a good thing. But economists worry that big gains, if sustained for a long period, could cause inflation to take off.

The Labor Department reported Thursday that productivity -- the amount an employee produces for every hour on the job -- grew at an annual rate of 3.2% in the January-to-March quarter.

That marked a welcome turnaround from the closing quarter of 2005, when productivity declined at an annual rate of 0.3%, economists said.

Meanwhile, workers’ hourly compensation in the first quarter increased to a 5.7% pace -- more than twice as fast as the 2.7% growth rate in the previous quarter.

“Labor costs have now become a warning flag for inflationary pressures,” said Joel Naroff, president of Naroff Economic Advisors. “They are rising fast enough to create real concerns that businesses will have to recoup some of those costs through higher prices.”

Because hourly compensation rose faster than productivity during the first quarter, employers’ unit labor costs went up at a 2.5% clip. Unit labor costs is a measure of how much companies pay workers for every unit of output they produce.

Although that was down from a 3% pace in the fourth quarter, the still-buoyant growth made some economists uneasy about inflation.

The Federal Reserve and other economists look at labor costs for clues about inflation.

Federal Reserve Chairman Ben S. Bernanke and his colleagues want to make sure that inflation doesn’t threaten economic activity. Thus, policymakers are expected to boost rates by another quarter percentage point, to 5%, when they meet Wednesday.

Some analysts believe that will be the last rate increase for a while in the Fed’s 2-year-old rate-raising campaign to thwart inflation. Others, however, think rates will rise to 5.5% percent before the Fed takes a break.

When adjusted for inflation, workers’ hourly compensation rose at a 3.6% pace in the first quarter, a more moderate showing than the unadjusted 5.7% growth rate. But the inflation-adjusted percentage is a vast improvement over the 0.6% decline in hourly compensation reported in the fourth quarter.

In other economic news, new claims for unemployment benefits rose last week by 5,000 to 322,000, the Labor Department said. Although jobless claims went up, the overall level still pointed to a good job-market climate.

Seasonal adjustment difficulties related to spring recesses may have distorted last week’s figure, a department analyst cautioned.

The increase left claims at their highest point since mid-November. Analysts were expecting a slight drop. Still, the trend has been toward improvement. A year ago, claims stood at 341,000.