South-Western College Publishing - Economics  
Inflationary Productivity Slowdown?
Subject Productivity
Topic Employment, Unemployment, and Inflation
Key Words Productivity, Inflation, Economic Growth
News Story

According to the Bureau of Labor Statistics' latest data for U.S. productivity, productivity growth has slowed considerably compared to the last six months. Higher productivity means that firms generate more revenue per worker without additional cost. The added revenue reduces pressure for the firm to raise prices. A productivity growth slowdown would create inflationary wage pressures.

Labor productivity rose at a 2.4 percent annual rate for the first quarter of 2000 compared with a 6.9 percent annual rate for the fourth quarter and a 5.0 percent rate for the third quarter of 1999. Even with the poor first quarter report, productivity for the past four quarters is a strong 3.7 percent.

Unit labor costs were up 1.8 percent for the quarter after falling in the previous two quarters. For the period from April 1999 to March 2000, unit labor costs rose only 0.7 percent. Hourly compensation, another measure of labor costs, rose at an annual rate of 4.2 percent for the quarter. Hourly compensation includes every outlay for labor, including bonuses and stock options when they are redeemed. Even though the 4.2 percent increase was not very different from the 3.8 percent increase in the previous quarter, it did outpace the growth in productivity and some economists consider this to be a sign that inflationary pressures are developing.

Another issue of concern to economists is whether the growth in productivity is concentrated in a few industries or widespread. The improvement in productivity in the past quarters is in manufacturing, especially in durable goods, with computers and computer chips showing the greatest gains. Outside these industries, productivity growth measures only 1.8 percent, according to Robert Gordon, a Northwestern University economist.

(Updated June 1, 2000)

1. What is meant by productivity and how is it measured?
2. Is there a difference between productivity and efficiency? Explain your answer.
3. How would a slowing of productivity growth create inflationary pressures?
Source Louis Uchitelle, "After Rising Steadily, Productivity Slows in First Quarter," The New York Times, May 5, 2000.

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