Worker output and pay pick up

Big gains spur inflation worries

May 05, 2006|Associated Press

WASHINGTON -- US workers raised their productivity in the opening quarter of this year. Their pay rose briskly, too.

From a worker's perspective more generous compensation -- wages and benefits -- is a good thing. But economists worry that big gains -- if sustained for a long period -- could raise inflation.

The Labor Department reported yesterday that productivity -- how much an employee produces for every hour on the job -- rose at an annual rate of 3.2 percent in the January-to-March quarter. That marked a welcome turnaround from the closing quarter of 2005, when productivity declined at an annual rate of 0.3 percent, economists said.

Meanwhile, workers' hourly compensation in the first quarter galloped ahead at a 5.7 percent pace -- more than twice as fast as the 2.7 percent growth rate in the previous quarter.

''Labor costs have now become a warning flag for inflationary pressures," said Joel Naroff, president of Naroff Economic Advisors. ''They are rising fast enough to create real concerns that businesses will have to recoup some of those costs through higher prices."

Federal Reserve chairman Ben Bernanke and his colleagues want to ensure that inflation doesn't threaten economic activity. Thus, policy makers are expected to boost rates by another quarter percentage point, to 5 percent, when they meet Wednesday.

When adjusted for inflation, workers' hourly compensation rose at a 3.6 percent pace in the first quarter, a more moderate showing than the unadjusted 5.7 percent growth rate. Still, it was a vast improvement over the inflation-adjusted 0.6 percent decline in hourly compensation reported in the fourth quarter.

Efficiency gains are important to the economy's long-term vitality because they allow it to grow faster without igniting inflation. Companies can pay workers more without raising prices, which would cut into those wage gains.