Productivity Growth Slowed

The efficiency of American workers rose in 2005 at the slowest pace since the recession year of 2001 while a key gauge of wage pressures rose at the fastest pace in five years, the government reported Thursday.

The Labor Department said productivity rose by 2.7 percent last year while labor costs rose by 2.4 percent, the biggest jump since a 4.2 percent increase in 2000. For just the final three months of the year, productivity actually fell by 0.6 percent, the first decline since early 2001, and labor costs rose by 3.5 percent.

The combination of slowing productivity -- the amount of output per hour of work -- and rising labor costs was likely to attract attention at the Federal Reserve, which is worried that rising wage demands could trigger inflation problems down the road.

"The glory days of surging productivity that kept labor costs down look to be behind us," said Joel L. Naroff, chief economist at Naroff Economic Advisors. "The expected slowdown in productivity has arrived, and that is putting pressure on costs and the Fed."

Productivity is considered a key factor determining U.S. living standards. Rising productivity allows companies to pay their workers more without having to increase the cost of production, which would boost inflation.

Since the mid-1990s, productivity has accelerated as the economy benefited from the use of high-tech tools such as computers and the Internet.

Productivity growth rose even faster following the 2001 recession as U.S companies laid off workers and succeeded in getting more output from smaller work forces. Productivity of non-farm businesses rose by 4 percent in 2002, 3.8 percent in 2003 and 3.4 percent in 2004.

The 2.7 percent gain in 2005 was the smallest since a 2.5 percent rise in 2001.

However, analysts cautioned that even with the slowdown in productivity growth for all of 2005, it was still slightly above the average for the past 50 years and more than double the weak growth rates during the 1970s and 1980s.

The government also reported Thursday that the number of Americans filing for unemployment benefits dropped to 273,000 last week, a decline of 11,000 from the previous week.

Analysts said the improvement in jobless claims so far this year could be signaling a strengthening in the U.S. labor market, meaning fewer layoffs and more job creation.

The Federal Reserve boosted short-term interest rates for a 14th time on Tuesday. Many economists are expecting at least one more rate hike on March 28 as the central bank tries to make sure that tighter labor markets do not trigger rising wage pressures that could push inflation higher.