South-Western College Publishing - Economics  
Pleasing Productivity Path
Subject Economic growth
Topic Productivity and Growth
Key Words Productivity, Labor Costs, Efficiency Gains
News Story

Federal Reserve Chairman Alan Greenspan characterized the recent performance of the economy as "phenomenal." The economy's strong growth, low inflation, low unemployment and strong profits in the business sector are in large measure the result of strong productivity growth. Seconding Chairman Greenspan's description are data released by the Labor Department indicating that productivity rose at a rapid annual rate of 4 percent in the first quarter of 1999. This productivity gain comes on top of a 4.3 percent increase in the fourth quarter of 1998. Back-to-back gains in productivity of this magnitude have not happened since the beginning of 1983.

Productivity gains on the order of 4 percent typically come during a recovery from a recession. It is very unusual for an economy in the ninth year of an economic expansion to experience efficiency gains of this magnitude. Furthermore, Greenspan added that the productivity gain "reflects, at least in part, a more deep-seated, still developing shift in our economic landscape."

Productivity growth has allowed firms to maintain control over production costs so that profits have risen without significant increase in the prices of goods and services. Hourly compensation increased at a 4.3 percent rate; however, this increase was offset by the rise in productivity. Workers' gains were also significant since the 4.3 percent increase in hourly compensation combined with consumer price increases of 1.5 percent, left inflation-adjusted compensation to increase at a 2.8 percent rate. In the manufacturing sector, hourly compensation rose 4.9 percent; 3.3 percent after adjusting for inflation. Efficiency gains are reflected in unit labor costs, the cost of labor per unit of output, which fell 0.9 percent in this sector.

(Updated June 1, 1999)

Questions How is productivity measured?
2. How do increases in productivity offset increases in worker compensation?
3. Why are movements in unit labor costs considered to be an indicator of inflation?
4. What are some factors that could cause productivity to increase?
Source John M. Berry, "Productivity Up for 2nd Quarter in Row", The Washington Post, May 12, 1999.

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