Productivity Numbers Drop, Cutting Into Wages

The productivity of American workers - the crucial factor in whether living standards improve - declined during the April-June quarter for the first time in over three years.

Productivity of nonfarm, nonsupervisory workers fell at a 0.2 percent annual rate, the Labor Department said Aug. 11. If the drop were to persist, it would undercut the rise in real wages Americans have been experiencing the past 18 months.

Meanwhile, the stock market plunged more than 200 points in early trading. That came after the Japanese yen plummeted to an eight-year low against the dollar, deepening investors' fears that more weakness would spill over into the United States economy.

The second-quarter productivity decrease was the first since the first three months of 1995. But it followed an increase at a 3.5 percent rate in the first quarter, the strongest in two years. Analysts attribute the productivity decline to the fact that most employers kept their payrolls at full strength despite an abrupt slowing in economic output attributed to trade problems with Asia, the General Motors strike, and the need to sell goods that had piled up in inventory.

Output soared during the first quarter at a 7 percent annual rate, but its growth slowed to a 1.3 percent rate in the second quarter. But, with labor scarce, particularly for skilled jobs, employers have been reluctant to order layoffs for fear they'd have trouble getting workers back when they needed them.

As a result, unit labor costs - a key measure of inflation pressure - increased at a 4.1 percent rate in the second quarter, the most in four years, after growing at a modest 1.1 percent rate in the first.

Relatively healthy productivity growth has been cited as an important support to the nation's prosperity in the past two years. Fast productivity growth keeps inflation low and helps the stock market because employers can increase workers' compensation and earn increased profits without raising prices.

From 1974 through 1995, productivity slowed to only a 1 percent. It picked up to a 2.4 percent rate in 1996 and maintained a 1.4 percent rate through 1997, leading some analysts to speculate that the economy was embarked on a new era of productivity growth, driven by computers and other innovations.

Now, however, they're expecting a bit of a relapse because, with joblessness near a 28-year low, workers still left to be hired have, in general, fewer marketable skills. Also, some high-tech resources are being devoted to curing the Year 2000 problem - the fact that many older computers read the year 2000 as 1900.