Worker Output Stalls, But Pay, Benefits Rise
By Martin Crutsinger, The Associated Press - December 4, 2006Washington - Growth in productivity - the key ingredient for rising living standards - skidded to a standstill in the late summer while workers' wages and benefits shot up at the fastest clip in 16 years.
The combination of slowing productivity and rising wages was seen as a formula for inflation troubles down the road. It could keep the Federal Reserve from cutting interest rates any time soon and possibly lead to another increase.
Productivity, the amount of output per hour of work, showed no growth from July through September. Growth was 1.3 percent over the past 12 months, the weakest showing in nine years.
The cost of wages and benefits measured by each unit of output grew at an annual rate of 3.8 percent in the third quarter.
Employee compensation climbed by 5.3 percent over the past year.
That gain matched a 12- month increase ending in late 1990 and was most recently outpaced by a 5.8 percent rise in the 12 months ending in the fourth quarter of 1982.
Both the extent of the weakness in productivity and the size of the increase in unit labor costs caught analysts by surprise. They said the numbers were certain to raise concerns at the Fed about inflation risks.
Higher wages and benefits are good news for workers, but such increases can trigger inflation if companies pass on the higher wage costs by making products more expensive.
Rising productivity allows companies to pay their workers more from the increased production rather than having to finance the wage increases through price increases.
"If rising unit labor costs are passed on in higher prices, that would mean stubbornly high inflation and no rate cuts from the Fed," said Nigel Gault, a senior economist at Global Insight.
Companies could pay the higher salaries from their profits, which have jumped in recent years, but that would mean less in returns for shareholders.
Wall Street had hoped the slowing economy would translate into Fed rate cuts, something put into doubt by the slowdown in productivity and rising wage pressures.
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