U.S. companies squeezed more work out of their staffs in the first three months of the year, but the gain in productivity was much slower than the previous three months.
Productivity rose at an annual rate of 1.6 percent in the January-March period compared to a 2.9 percent increase in the previous quarter, the Labor Department reported Thursday. Labor costs rose at a 1 percent annual rate in the January-March period after falling 1 percent in the previous three months.
A slowdown in productivity growth is bad for the economy if it persists for a long period. But it can be good in the short term when unemployment is high because it signals companies must hire more workers in order to make further gains.
Analysts expect productivity will slow to around 2 percent growth for the year. They say companies are reaching the limits on how much they can get from their existing work forces and will have to begin hiring more workers in order to boost output further. They also forecast that labor costs will begin rising modestly after two years of declines.
Companies found ways to produce more goods and services with fewer workers during the recession. Greater productivity helped them boost profits. But it also allowed them to hold back on hiring after companies slashed millions of jobs during the downturn.
"During the recession and early stages of the recovery, firms were able to put pressure on workers to take pay cuts/freezes, agree to changes in working practices or simply work harder," said Paul Ashworth, chief U.S. economist at Capital Economics. He said workers are not suddenly in a position to demand big pay increases, noting that unemployment remains high. But companies have probably reached the limits on the cost-cutting they can do without affecting their profit margins.
Employment growth has picked up in recent months. Businesses added more than 200,000 workers in both February and March _ the best two-month hiring stretch in five years. The unemployment rate fell to a two-year low of 8.8 percent in March.
Productivity is the amount of output per hour of work. The Federal Reserve watches this figure carefully. Increases in productivity allow companies to pay workers more without being forced to boost the prices of their products, which can cause inflation.
The cost of labor per unit of output is expected to return to positive territory this year after having falling in both 2009 and 2010. However, the increase is expected to be well below levels that would signal wage pressures which could trigger inflation concerns.