Worker productivity up, wage pressure moderate

WASHINGTON - Worker productivity increased at a faster pace in the first three months of this year than previously estimated, while wage pressures moderated.

The Labor Department reported today that productivity rose at an annual rate of 2.6 percent in the January-March period, faster than the government's initial estimate of 2.2 percent made a month ago.

Wage pressures, meanwhile, moderated from the final three months of last year with unit labor costs rising at an annual rate of 2.2 percent in the first quarter. That was a marked slowdown from a 4.7 percent surge in labor costs in the final three months of last year.

While rising wages and benefits are good for employees, those increases can lead to higher inflation if businesses are forced to boost the cost of their products to cover the higher payroll costs. However, if productivity is increasing, it allows businesses to finance higher wages out of the increased output.

The Federal Reserve, always on guard about the threat of inflation, closely monitors developments in productivity since wage pressures are often the main way inflation gets out of control.

The 2.6 percent rate of growth in productivity was a significant improvement from a 1.8 percent increase in the final four months of last year. The 2.2 percent rise in labor costs, unchanged from the initial estimate a month ago, marked a sharp slowdown from a 4.7 percent rate of growth in labor costs in the fourth quarter of last year.

Those developments should be welcomed by the Fed, which has started to worry more about inflation pressures in the face of a relentless surge in energy and food costs. The Fed cut rates for a seventh time on April 30, but the reduction was a smaller quarter-point move. The central bank indicated the rate cuts could be drawing to a close as the attention shifted from worrying about keeping the country out of a steep recession to concerns about inflation.

Fed Chairman Ben Bernanke discussed his inflation concerns in a speech yesterday, worrying that a rapid rise in prices, if sustained, "might lead the public to expect higher long-term inflation rates, an expectation that ultimately could become self-confirming."

Bernanke's remarks were seen as a strong signal that the Fed is through cutting interest rates and may start raising rates later this year as a way to battle inflation pressures.

The Fed wants to make sure that soaring energy costs don't produce higher wage pressures that could trigger a disastrous wage-price spiral like the country experienced in the 1970s.