US worker productivity slumped again in Q1

WASHINGTON – American workers were less productive again in the January-March quarter, although the decline wasn’t as severe as first thought. Meanwhile, labour costs climbed at a faster pace than initially estimated.

The Labor Department said Tuesday that productivity declined at an annual rate of 0.6 per cent in the first quarter after a 1.7 per cent drop in the fourth quarter. The government first estimated that productivity fell at a 1 per cent rate. Labor costs for employers rose at a 4.5 per cent rate in the first quarter, even faster than the 4.1 per cent gain first reported.

Productivity has been weak for the past five years, a troubling development since productivity growth is the key factor that pushes up living standards. The rise in labour costs indicates that worker pay is finally climbing after an extended period of weak wage growth.

Blerina Uruci, an economist with Barclays Research, said she forecasts only modest productivity growth in the coming years, with “limited scope for an imminent return” to the stronger productivity gains that were occurring before the 2007-2009 recession.

Fed Reserve Chair Janet Yellen said Monday that lacklustre productivity gains represented a key uncertainty facing the economy. Productivity growth has been unusually weak over the past five years, averaging just 0.5 per cent per year, just one-third of the annual gains seen from 1970 to 1990, she said.

While some economists are pessimistic about the prospects for productivity in the coming years, Yellen remains “cautiously optimistic” as the adverse effects of the Great Recession on investment spending and research begin to fade.

But she also urged pursuit of policies that would boost productivity saying “strengthening education and promoting innovation and investment” would support longer-term growth in productivity and greater gains in living standards.

The upgraded estimate for productivity in the first quarter reflected the fact that the government revised its estimate for total output, as measured by the gross domestic product, showing GDP grew at a 0.8 per cent rate in the January-March quarter. That was slightly stronger than the 0.5 per cent gain first reported.

Productivity is the amount of output per hour of work. While output was revised higher, it wasn’t enough to compensate for the fact that employment — and thus the number of hours worked — rose at a faster pace in the first quarter.

The 4.5 per cent rise in labour costs in the first quarter followed an even sharper 5.4 per cent increase in the fourth quarter. While gains at this pace could raise concerns about inflation, the increases are coming after an extended period of wage weakness. Economists believe American wages have room to increase at faster rates before becoming an inflation problem.