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WASHINGTON — The deepening recession caused worker productivity to slide by a worse-than-expected amount in the fourth quarter while wage pressures shot up at the fastest clip in two years.
The Labor Department said Thursday that productivity, the amount of output per hour of work, fell at an annual rate of 0.4 percent in the October-December period. At the same time, unit labor costs were surging by 5.7 percent.
While the combination of falling productivity and rising wage pressures would normally raise alarm bells about inflation, the threat of any resurgence of price pressures is seen as remote given the severity of the current recession.
The 0.4 percent decline in productivity was far weaker than the 1.5 percent increase that economists had expected. It represented a revision from the government's initial estimate a month ago that productivity in the fourth quarter was rising at an annual rate of 3.2 percent.
The sharp reduction reflected the fact that the overall economy was contracting by a much larger amount in the fourth quarter than the government initially thought. The Commerce Department reported last week that the gross domestic product, the economy's overall output of goods and services, fell at a 6.2 percent pace in the fourth quarter, the worst showing in a quarter century and much worse than the 3.8 percent drop originally estimated.
Since productivity is the amount of output per hour of work, the big decrease in output translated into a sharp fall in productivity. And even with the massive layoffs that have been occurring in recent months, output was falling at a faster pace than companies were slashing their payrolls. That meant labor costs per unit of output showed an increase.
The 5.7 percent rise in unit labor costs was the largest quarterly gain since a 9.6 percent surge in the final three months of 2006.
For all of 2008, unit labor costs rose by a much more modest 0.9 percent, down from a gain of 2.7 percent in 2007. Economists said the decrease in the annual figure was more representative of the trend in labor pressures currently.
They do not expect wage pressures to represent an inflation threat for some time given the current environment in which workers are more worried about keeping their jobs than about demanding higher wages.
For the entire year, productivity rose by 2.8 percent, double the 1.4 percent rise in 2007.
Productivity is considered the key ingredient needed for rising living standards because it allows businesses to pay their employees higher wages financed by their workers' increased output. That means companies can increase employee compensation without increasing the prices of their products which could boost inflation.
The severe recession, which has triggered massive layoffs, is keeping a lid on wage pressures and economists believe that will not change until a sustained rebound has started, something they don't see occurring for many more months.
Just this week, more companies announced they were cutting jobs. United States Steel Corp., the largest U.S.-based steel maker, said it was temporarily idling some operations in Canada, a move that will affect 1,500 workers, due to slumping demand for steel.
Tyco Electronics Ltd., which makes electronic components, and Diageo PLC, the world's largest producer of alcoholic drinks, also announced further layoffs.
In its latest survey of economic conditions, the Fed reported Wednesday the economy deteriorated further in the last two months and that business people expect no improvement until late this year at the earliest.
