WASHINGTON — Productivity growth rose at the quickest pace in two years in the third quarter, the Labor Department reported todya, but lofty energy prices erased any wage gains by workers.
Economists were struck by such fast productivity growth because businesses typically have trouble squeezing more output from workers this far into the business cycle, as they compete for a shrinking pool of available workers.
"We're well into the expansion which is why it's so very impressive," said Lynn Reaser, an economist at Bank of America.
Productivity in the non-farm business sector rose at a 4.7 percent annual pace, leading to a 1 percent drop in the cost of producing a single unit of output, the government reported.
The report confirmed the view that the U.S. is enjoying a prolonged productivity boom which, along with easing inflationary pressures and rising profits, usually translates into higher wages and living standards.
But while the higher productivity has helped to fatten corporate profits, hourly compensation only grew at a 3.7 percent annual pace in the third quarter. But their buying power shrunk. After being adjusted for inflation, wages actually shrunk at a 1.4 percent annual rate.
"More often than not, higher productivity growth means higher wages, something that the President is very focused on," said White House spokesman Scott McClellan.
Productivity, which jumped 3.1 percent in the third quarter from the year earlier, averaged 3.28 annual gains from 2000 to 2004. To put this in perspective, the roughly 2 percent productivity gains logged during the 1990s tech boom were considered extraordinary, as productivity only grew at a sluggish 1.7 percent annual rate in the 25 years prior to 1995.
The stock market rallied on the report, which was seen as a evidence of contained inflation and a bright outlook for businesses.
"If unit labor costs are falling, that's good for profits," said Nigel Gault, chief economist at Global Insight, a research firm in Lexington, Massachusetts.
But the fact that businesses are having such success wringing more output out of workers means that they are less likely to increase their payrolls for now, economists said.
"As long as they go on getting good productivity results, they're going to keep on following that strategy," Gault said.
After two months of sluggish job growth, the economy added 215,000 jobs in November and the unemployment rate, which hasn't risen above 5.5 percent. in the past 13 months, held steady at 5.0 percent.
Still, many economists believe that the productivity gains aren't showing up in paychecks because the economy has yet to reach full employment — the level of employment that generates just enough upward pressure on wages to stabilize the growth of profits.
And with too much slack in the labor market, workers don't have enough bargaining power to wrangle pay raises from their bosses.
But other economists argue that the tightness of the U.S. labor market means little when unfettered competition puts pressure on employers to keep labor costs down and businesses can easily move production offshore.
"It's all about the alternatives available to employers," Gault said.
Adjusted for inflation, profits have jumped by 52 percent since the fourth quarter of 2001, roughly the start of the recovery. Over the same period, inflation-adjusted, median weekly earnings for full-time workers was down slightly, 0.6 percent, according to Jared Bernstein, an economist from the liberal Economic Policy Institute in Washington.
But economists insist that workers will eventually start grabbing a bigger slice of the cake.
"We expect the pendulum to swing from profits to wages as the job market continues to improve," Reaser said.
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