Flooring News and Information

Washington, DC, Nov. 7—Worker productivity rose in the third quarter by the largest amount in more than a year as businesses, coping with the weak economy, cut workers' hours at the fastest pace in a decade. Productivity—the amount of output per hour of work—increased at an annual rate of 2.7% in the third quarter, up from a 2.2% growth rate in the second quarter, according to the Labor Department.

The third quarter's performance was better than the 2% productivity gain many analysts were expecting and marked the biggest increase since the second quarter of last year, when productivity jumped 6.3%.

One of the biggest reasons for the increase in productivity is that businesses cut workers' hours at a 3.6% rate—the largest drop in hours since the first quarter of 1991. Output declined at a rate of 1%, the biggest decrease since the first quarter of 1993.

In response to sagging sales, businesses have not only cut employees' hours but they’ve laid off hundreds of thousands of workers. A total of 415,000 jobs were eliminated in October, the biggest one month drop in 21 years.

The rise in productivity came even as the economy has declined. In general, productivity tends to rise strongly when the economy is booming, but gains in productivity can become weak or productivity can fall when the economy slows or contracts as it did in the third quarter.

Gains in productivity allow companies to pay workers more without raising prices, which would eat up those wage gains. If productivity falters, however, pressures for higher wages could force companies to raise prices, thus worsening inflation.

The rise in productivity helped moderate unit labor costs, a gauge of inflation. Unit labor costs in the third quarter rose at an annual rate of just 1.8%, down from a 2.6% rate of increase in the second quarter. The third quarter increase was the smallest since the second quarter of 2000 and was a much better showing than the 2.5% rise many analysts were forecasting.

Federal Reserve Chairman Alan Greenspan and his colleagues remain bullish about the long term prospects of productivity growth, even though businesses, responding to the slowdown, have pared back investment in computers and other productivity enhancing equipment.

Increased spending on security in the wake of the September 11 terror attacks could “restrain advances in productivity for a time,” Fed policy makers acknowledged in a statement Tuesday announcing their 10th interest rate cut this year. But “the long term prospects for productivity growth ... remain favorable,” they added.

From 1973 to 1995, productivity averaged lackluster gains of just above 1% per year. But since 1995, increases have more than doubled.