The Labor Department reported Tuesday that productivity -- the amount of output per hour of work -- rose at an annual rate of 2.5% in the April-June quarter. This follows an upwardly revised first-quarter productivity growth rate of 0.1%.
The second quarter's performance exceeded the 1.5% growth rate many analysts were projecting for the period and was the biggest gain since the second quarter of 2000, when productivity jumped by a 6.3% rate. Productivity increased in the second quarter as output edged up at a 0.1% rate and hours of all workers fell at a 2.4% rate, the largest decline in hours since the first quarter of 1991.
Annual revisions showed that, from 1996 through 2000, productivity growth averaged 2.5%, rather than the 2.8% average originally reported. The biggest annual revision was for 2000, which showed productivity grew by 3.0%, rather than 4.3%.
That downward revision for last year in part reflected the fact that 2000 output, as measured by the gross domestic product, was recently revised to 4.1% from 5%. The government lowered its GDP estimate largely because it had overestimated business investment in computer software.
Tuesday's report also showed that unit labor costs, a gauge of inflation pressures, rose by a smaller-than-expected rate of 2.1% in the second quarter, a moderation from the 5.0% rate posted in the first quarter.
Gains in productivity are the key to rising living standards because they allow wages to increase without triggering inflation that would eat up those wage gains. If productivity falters, however, pressures for higher wages could forces companies to raise prices, thus worsening inflation.
Federal Reserve Chairman Alan Greenspan told Congress last month that he remains bullish about the long-term prospects of productivity growth and that the tiny gain in productivity seen in the first quarter represented only a temporary lull and was a byproduct of the sagging economy.
For 1973 through 1995, productivity averaged lackluster gains slightly greater than 1% per year. But since 1995 increases have more than doubled, allowing companies to pay workers higher salaries without raising the prices of their products.
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