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Labor costs rise but higher productivity cause for optimism

by Christie Washam
March 07, 2012


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Bureau of Labor Statistics/ Christie Washam/MEDILL

2011's fourth-quarter increase in productivity was outpaced by strong third-quarter growth. Likewise, the full-year 2011 wasn't as productive as 2010.

U.S. productivity continued to rise in the fourth quarter but at a slower rate than during the previous three-month period. Rising labor costs put a slight damper on the optimistic report.

The Bureau of Labor Statistics also released revised productivity and unit labor cost numbers for the third quarter Wednesday.

In the fourth quarter, labor costs rose 2.8 percent from the previous period, more than double what analysts surveyed by Bloomberg LP had been expecting. The jump comes on the heels of revised gross domestic product figures released last week, which also showed higher than expected growth.

Rising costs are a double-edged sword. On one hand, “It may become more expensive for businesses to hire people,” said Adolfo Laurenti, deputy chief economist with Mesirow Financial Holdings Inc. in Chicago.

That’s something to keep in mind because unemployment rates are still so high. If hiring is too expensive, companies will do less of it, making it hard to drain the pool of unemployed people, he said.

But higher labor costs also indicate more people are working and for bigger paychecks, which provides a boost for the economy.

Productivity, which is measured by dividing an index of output by an index of hours worked, increased 0.9 percent in the last quarter of 2011. However, the third quarter’s jump in productivity was more than double that at 1.8 percent. Still, the indicator showed overall strength as output increased nearly 4 percent and hours worked nearly 3 percent in the fourth quarter.

The manufacturing sector lagged behind other industries as productivity declined slightly, but the falloff was less than economists had expected. Hours worked posted their highest quarterly percentage gain since 1996, a strong sign that previously vacant jobs in the sector are being filled. Many manufacturers are struggling to keep up with increasing demand and are racing to hire enough qualified employees.

“What jumped to my eyes was hours growing faster than output. This is a good indicator that production will continue to expand,” Laurenti observed. Hours worked is a leading indicator. The more hours worked, the stronger the economy will be, he added.

For all of 2011, productivity rose 0.3 percent, the bureau said, slightly less than previous estimates due to a higher amount of hours worked. In 2010, it rose 4 percent. Year-over-year slowing productivity growth is somewhat of a concern, but economists aren’t worried.

“It is not unusual to have productivity surge at the very beginning of a recovery and then temporarily slow down as hours worked increased more sharply,” said Brian Westbury, chief economist as First Trust Portfolios LP, in a note.