U.S. Productivity Climbs 0.7% But 1996 Increase Falls Far Short Of Gains Achieved In Past Years

Americans’ productivity, the key measurement of how quickly living standards can rise, increased 0.7 percent last year. It was the best performance in four years but still below the standard set in the 1950s and 1960s.

The gain, reported Tuesday by the Labor Department, was more than double 1995’s 0.3 percent advance. Though not far short of the typical annual gains seen since the mid-1970s, it was far below the performance in the decades after World War II. In the 1960s, for instance, annual gains on average exceeded 3 percent.

Productivity measures output per hour of work. Its sluggish growth since the 1970s is viewed as the root cause of many economic problems, including slow income growth and a pervasive feeling of insecurity among workers.

However, in recent years, many economists believe actual productivity improvements have been better than depicted in government reports.

“Although we cannot quite measure output properly, we know there’s more of it,” said economist Sam Kahan of A.S.K. Financial Research Ltd. in Chicago. “We have changes in technology that are improving our output in all areas.”

“The primary force is computers,” he said. “It ranges from banking, where you don’t have to see a teller, you can go to an ATM or bank by computer, to how a person writes a report or … to how you have inventory control.”

He estimated that actual productivity improvement could be as much as 1 percentage point greater than reported by the Labor Department.

“This may be one explanation of why we’ve had fabulous price behavior even though economic growth seems to be pushing its limits,” he said.

Tuesday’s report is a downward revision from the 0.8 percent annual gain reported a month ago.

In the fourth quarter, the Labor Department said, productivity grew at a 1.1 percent annual rate, only half the 2.2 percent figure first reported.

That occurred because hours worked increased more than had been thought and output increased less. In addition to a more modest fourth-quarter productivity gain, the result was a steeper rise in unit labor costs, which take account of both hourly wages and productivity. They rose at a 2.5 percent annual rate in the quarter compared with the milder 1.4 percent rise originally reported.

Nevertheless, the revision wasn’t enough to change the unit labor cost gain for all of 1996: 2.9 percent, same as 1995. An acceleration in unit labor costs can be a sign of inflationary pressure that eventually could affect consumer prices.

With unemployment near a seven-year low - 5.3 percent in February - economists expect wage pressures will cause unit labor costs to rise more steeply this year.

Since labor contributes about two-thirds of a product’s costs, that leaves businesses with two options: accept a slimmer profit margin or increase product prices.