- The Washington Times - Thursday, February 7, 2002

Worker productivity grew briskly in the fourth quarter of last year as businesses coping with economic hard times slashed workers' hours by the largest number in a decade and eliminated jobs.
The Labor Department reported yesterday that productivity the amount of output per hour of work increased at an annual rate of 3.5 percent in the October to December quarter, up from a 1.1 percent rate in the previous quarter.
But the improvement came at a price. Businesses responded to slumping sales by sharply cutting back on their payrolls. That caused the total number of hours worked to drop at a faster pace than output, thus creating a rise in productivity.
Workers' hours in the fourth quarter fell at a 3.7 percent rate the biggest drop since the first quarter of 1991 and output declined at a 0.4 percent rate. Jobs losses averaged 311,000 for the final three months of last year.
"Corporations are still choosing to cut costs as a means to improve productivity as opposed to investing in human or technological capital," said Carl Tannenbaum, chief economist at LaSalle Bank/ABN AMRO.
"For years we've talked about the virtuous cycle of productivity where investment in technology has made us more efficient," he said. "But productivity can have a darker side it can be improved by reducing the hours worked."
For all of 2001, productivity rose 1.8 percent, the weakest showing since 1995, and a deceleration from the 3.3 percent increase posted in 2000. The slower productivity growth seen last year reflected the impact of the sour economy.
In general, productivity tends to rise strongly when the economy is booming. Gains in productivity can become weak or productivity can fall when the economy slows or contracts.
The economy slipped into recession in March, but signs of an economic rebound have emerged recently.
Still, analysts viewed last year's 1.8 percent productivity gain as quite respectable, given that the country was suffering through a recession. In comparison, during the country's most recent recessions, productivity rose 1.2 percent in 1991 and fell 0.6 percent in 1982.
The rise in productivity in the fourth quarter helped to moderate unit labor costs, a gauge of inflation. Unit labor costs actually fell at an annual rate of 1.1 percent, after rising at a rate of 2.6 percent in the third quarter.
But for all of 2001, unit labor costs rose 3.9 percent, the biggest gain since 1990. In 2000, these costs increased 3.1 percent.
In the long run, productivity gains are good for workers, for the economy and for companies, whose profits have taken a hit during the economic slump, analysts said.
Gains in productivity allow companies to pay workers more without raising prices, which would eat up those wage gains, and permit the economy to grow faster without triggering inflation. If productivity falters, however, pressures for higher wages could force companies to raise prices, thus worsening inflation.
"With productivity holding up and labor costs under control, the prospects for a recovery of both the economy and profits look good," said economist Joel Naroff of Naroff Economic Advisors.
The 3.5 percent productivity growth rate in the fourth quarter marked the biggest increase since the second quarter of 2000, when productivity rose at a 6.7 percent rate.
Federal Reserve Chairman Alan Greenspan and his colleagues remain bullish about the long-term prospects of productivity growth, even though businesses have pared investments in computers and equipment.
"With the forces restraining the economy starting to diminish, and with the long-term prospects for productivity growth remaining favorable and monetary policy accommodative, the outlook for economic recovery has become more promising," Fed policy-makers said in a statement last week.

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