US productivity shrinks again in first quarter

WASHINGTON – The productivity of American workers fell again in the first three months of the year, while labour costs for employers rose at the fastest pace in more than a year.

Productivity declined at an annual rate of 1 per cent in the January-March period, following a 1.7 per cent decline in October-December quarter, the Labor Department reported Wednesday.

Productivity, the amount of output per hour of work, has been weak for a number of years. Economists worry about the consequences on American lives if it doesn’t improve. Productivity is a key ingredient needed for rising living standards. Higher productivity enables businesses to pay employees higher wages without having to boost the cost of the products and services they sell.

Labour costs rose at a rate of 4.1 per cent in the first quarter, reflecting rising wages. That was the fastest increase since a 5.7 per cent jump in the fourth quarter of 2014. Labor costs had been up 2.7 per cent in the fourth quarter.

Laura Rosner, an economist at BNP Paribas, said that productivity growth has averaged just 0.5 per cent over the past five years, compared to 2.5 per cent to 3 per cent growth per year in the previous expansion. She called the slowdown a “disturbing trend with negative implications for the growth outlook.”

The weakness in productivity for the first quarter wasn’t surprising since overall output, as measured by the gross domestic product, had slowed sharply. The GDP grew at a rate of just 0.5 per cent in the first three months of the year, the slowest pace in two years.

For all of 2015, productivity rose just 0.7 per cent, marking the fifth straight year of weak gains.

The Federal Reserve keeps watch on both productivity and labour costs as it deliberates how quickly it should raise interest rates to keep inflation under control. The Fed raised a key rate by a quarter-point in December, the first increase in nearly a decade. But weaker economic data has kept the Fed on the sidelines so far this year.

Productivity recently has been growing well below the 2.2 per cent average gains seen over the past 68 years. It had accelerated for a decade starting in 1995. Those gains were attributed to improvements in computer software and the introduction of technology that helped workers do their jobs more efficiently. For the nine years from 2007 through 2015, productivity has averaged a weak 1.2 per cent average annual gain.

Some economists believe the recent slowdown in productivity is partly the result of a drop in business investment in new equipment. They are forecasting an acceleration once business investment picks up. But other economists say that the country may be stuck in a prolonged period of weak productivity growth.