Originally created 08/06/99

Productivity slows, wage pressures jump in second quarter



WASHINGTON -- American workers' productivity slowed significantly in the spring while a key gauge of wage pressures jumped sharply, the Labor Department reported today.

Productivity, defined as the amount of output for each hour of work, increased at an annual rate of just 1.3 percent in the April-June quarter, far below the 3.6 percent rate of productivity growth in the first three months of the year.

Meanwhile, unit labor costs, considered a key measure of wage pressures, surged at an annual rate of 3.8 percent in the second quarter, the worst showing for this measurement since the end of 1997.

The big jump in unit labor costs far exceeded analysts' expectations. Many were looking for a gain of around 2.2 percent, which would have been a pickup from the modest gain of 0.8 percent in the first quarter and an outright decline of 0.4 percent in the fourth quarter of last year.

Financial markets have been jittery over the prospects that the Federal Reserve will raise interest rates again later this month. Those fears were heightened two weeks ago when Fed Chairman Alan Greenspan told Congress that recent strong gains in productivity were likely to moderate.

Greenspan and many other economists believe the good showing on productivity has helped keep inflation low. With productivity rising sharply, employers are able to boost wages and pay the higher salaries through increased output, rather than raising the prices of their products.

But Greenspan warned two weeks ago that if productivity slows, wage pressures are likely to quickly surface, given that labor markets are the tightest in nearly three decades.

"The positives of strong productivity and tame labor-cost growth that we have had may be coming to an end, but it's too early to tell," said Rick Egelton, an economist with Bank of Montreal. "We need to see more data in the future to see whether the figures were an aberration or a trend."

In another report today, the number of Americans filing new claims for unemployment benefits inched up last week after hitting their lowest level in two years the week before.

The Labor Department reported that 279,000 Americans filed new claims for jobless benefits for the week ending July 31, up by 4,000 from the previous week.

Economists consider any claims level below 300,000 an indication of an extremely tight labor market.

The government will release the latest unemployment report on Friday and many economists expect the rate -- now at 4.3 percent -- will return to a 29-year low of 4.2 percent in July.

The 1.3 percent increase in productivity was the slowest quarterly increase since the second quarter of last year when productivity only rose at a 0.4 percent rate.

The slowdown in productivity reflected the fact that the gross domestic product, the total output of goods and services, also slowed sharply to an annual rate of 2.3 percent in the second quarter of this year, compared to 4.3 percent in the first quarter.

For all of 1998, productivity rose by 2.2 percent, which was almost double the 1.2 percent increase of 1997. Greenspan has noted this sharp improvement as evidence to support his view that the nation's heavy investment in computers and other productivity-enhancing technology is beginning to pay off.

The 3.8 percent rate of increase in unit labor costs, compared to modest increases of just 2 percent in 1998 and 2.3 percent in 1997.

Analysts had already begun to worry about wage pressures following a report last Thursday that the Employment Cost Index, which includes both wages and benefits paid to workers, rose at an annual rate of 1.1 percent in the second quarter of this year, the biggest gain in eight years.



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