Worker Productivity Up: Good or Bad News

Martin Crutsinger reports – and opines:

The Labor Department reported Wednesday that productivity, the amount of output per hour of work, increased at an annual rate of 2.2 percent in the first quarter. That was slightly higher than the 1.5 percent increase which had been expected. In a sign that inflation could be easing, labor cost pressures slowed a bit. Unit labor costs rose at an annual rate of 2.2 percent, down from a 2.8 percent rise in the final three months of last year. While rising wages and benefits are good for employees, those increases can lead to higher inflation if businesses are forced to boost the cost of their products to cover the higher payroll costs. However, if productivity is increasing it allows businesses to finance higher wages out of the increased output.

He is assuming that the higher productivity is attributable to strong real GDP growth but real GDP growth has been quite weak for the past two quarters. Could it be that the ratio of output to labor hours rose because fewer people have jobs? Perhaps as his report later notes:

Private economists believe the weakening economy will dampen inflation pressures. However, the sharp economic slowdown is occurring at the same time that energy and food prices have continued to rise. Many analysts think that the country has already toppled into a recession. But overall economic growth, as measured by the gross domestic product, eked out a tiny 0.6 percent rate of increase in the first three months of the year, the same anemic pace as the final three months of last year. The rise in productivity in the first three months of the year occurred as the number of hours worked declined at an annual rate of 1.8 percent.

Let me also object to his concern that nominal wages were rising too quickly. If nominal wages fail to keep pace with rising consumer prices, we see reduced real wages. As our graph of the real wage for nonsupervisory workers show, real wages for some have not increased that much over the past five years.