WASHINGTON – American worker productivity fell this spring more quickly than previously estimated while labour costs were rising at a faster clip. Both developments could pose threats to a fragile economic recovery.
The U.S. Labour Department reported Thursday that productivity declined at an annual rate of 0.7 per cent in the April-June period, a bigger drop than the 0.3 per cent decline reported a month ago.
Labour costs rose at an annual rate of 3.3 per cent, faster than the 2.4 per cent 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 labour costs would cut into corporate profits.
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Economists are forecasting that productivity will slow over the next couple of years while labour 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 per cent last year, the strongest performance in eight years. Economists at JPMorgan Chase are forecasting that productivity this year will grow by just 0.7 per cent.
Analysts also expect labour costs to rise at a faster clip this year but that will come after a 2 per cent decline in labour 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 per cent drop in productivity in the April-June quarter followed a 0.6 per cent productivity decline in the first quarter. The 3.3 per cent rise in unit labour costs in the second quarter followed a 6.2 per cent increase in the January-March period.
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