Productivity falls in spring, labor costs rise


The Labor Department reported Thursday that productivity declined at an annual rate of 0.7 percent in the April-June period, a bigger drop than the 0.3 percent decline reported a month ago. Labor costs rose at an annual rate of 3.3 percent, faster than the 2.4 percent increase originally reported.

The changes reflected downward revisions made last week to overall economic growth which showed the economy's output barely growing in the spring. Declining productivity, if it persists for a prolonged period, would represent a serious economic threat while rising labor costs would cut into corporate profits.

Economists are forecasting that productivity will slow over the next couple of years while labor costs will increase. However, they don't see these developments as worrisome during the current period of high unemployment and weak income growth.

They argue that the economy can tolerate a brief period of weaker productivity growth if it means that companies have reached the limit on the amount of work they can squeeze out of the existing work force and begin hiring back the millions of workers laid off during the recession. That would boost income growth and result in stronger consumer demand which they hope will drive the economy to a faster expansion.

During the recession and immediately afterward, productivity soared with worker efficiency rising at an annual rate of 4.1 percent last year, the strongest performance in eight years. Economists at JPMorgan Chase are forecasting that productivity this year will grow by just 0.7 percent.

Analysts also expect labor costs to rise at a faster clip this year but that will come after a 2 percent decline in labor costs in 2010 which was the largest drop on records that go back six decades. With the economy growing at such a weak pace and unemployment remaining high, workers have little bargaining power to push for wage increases.

The 0.7 percent drop in productivity in the April-June quarter followed a 0.6 percent productivity decline in the first quarter. The 3.3 percent rise in unit labor costs in the second quarter followed a 6.2 percent increase in the January-March period.

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