Worker productivity rises, labor costs fall

Associated Press
FILE - In this Jan. 26, 2011 file photo, an assembly line worker welds a cab frame on a Volvo truck at the plant in Dublin, Va. U.S. workers increased their productivity this summer by the largest amount in a year and half, and they cost their employers less. The trend is good for corporate profits but not necessarily for job growth.(AP Photo/Steve Helber, File)
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FILE - In this Jan. 26, 2011 file photo, an assembly line worker welds a cab frame on a Volvo truck at the plant in Dublin, Va. U.S. workers increased their productivity this summer by the largest amount in a year and half, and they cost their employers less. The trend is good for corporate profits but not necessarily for job growth.(AP Photo/Steve Helber, File)

WASHINGTON (AP) — U.S. workers increased their productivity this summer by the largest amount in a year and half, and they cost their employers less. The trend is good for corporate profits but not necessarily for job growth.

The Labor Department says productivity rose at an annual rate of 3.1 percent in the July-September quarter after two straight quarterly declines. Labor costs dropped at an annual rate of 2.4 percent in the third quarter, the first decline since late 2010.

Productivity is the amount of output per hour of work. The big jump in productivity in the third quarter was largely because the economy had its best quarterly growth in a year while hours worked were little changed.

Higher productivity is generally a good thing because it can raise standards of living by enabling companies to pay workers more without raising their prices and increasing inflation.

But unless companies see sustained demand, they are unlikely to hire.

Worker productivity fell during the first six months of the year, while labor costs increased. That was largely because consumers cut back on spending in the face of higher food and gas prices, which slowed overall economic growth.

Over the summer, consumers increased their spending at triple the rate from the spring. That helped the economy expand at an annual rate of 2.5 percent in the July-September quarter, which likely boosted worker productivity.

When demand rises and productivity is low, it's usually a sign that businesses have reached the limit on the amount of work they can squeeze out of their work forces. That often leads some to hire more workers, if they want to grow.

But economists worry that the demand from this summer won't be sustained. The growth was fueled by Americans who spent more while earning less and by businesses that invested in machines and computers, not workers.

Without more jobs and higher wages, consumers are likely to pare spending next year.

The drop in labor costs suggests "that consumer spending cannot accelerate further unless ... income growth picks up," said Jennifer Lee, an economist at BMO Capital Markets, in a note to clients.

Economists expect productivity to slow over the next couple of years while labor costs rise. Forecasters with the National Association for Business Economics predict that productivity growth will slow to 1 percent this year compared to growth of 4.1 percent in 2010.

However, analysts said that the slowdown in productivity growth has played a role in the modest gains seen this year in employment.

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