Unit labor costs fall 5.8% in second quarter, the most in nine years By Rex Nutting, MarketWatch WASHINGTON (MarketWatch) - U.S. companies slashed their workers' hours in the second quarter, boosting the productivity of the workplace at an annualized rate of 6.4%, the Labor Department reported Tuesday. It was the fastest increase in productivity in the nonfarm business sector in nearly six years. Economists surveyed by MarketWatch were looking for a gain of 5.4%. See Economic Calendar. Unit labor costs - a key indicator of inflationary pressures - plunged at a 5.8% rate, the largest decline in nine years and a slightly larger drop that the 5.3% decline expected by economists. Hourly compensation rose just 0.2% in the second quarter. After inflation, real hourly compensation sank 1.1%. The report shows why corporate profits have boomed: While output fell just 1.7% annualized, hours worked declined at a 7.6% annual rate and hourly earnings barely increased. The early stages of recovery are typically the best for productivity. Output is rising, but cost-cutting plans are still being implemented. In the past year, productivity is up 1.8%, while unit labor costs have dropped 0.6%. In the past year, output is down 5.6%, the largest decline since the record-keeping began in 1948. Hours worked are down 7.3% in the past year, also the largest decline on record. In the manufacturing sector, productivity increased at a 5.3% pace, the best in four years. Unit labor costs rose 0.5%. Output fell 9.9%, while hours worked fell 14.4%. Real hourly compensation in manufacturing rose 4.4%. Productivity, a concept that's simple in theory but elusive in practice, is output divided by hours worked. Productivity gains are the key to higher living standards, higher wages, increased profits and low inflation. High productivity growth means the economy can grow rapidly without inflation, raising living standards and theoretically allowing workers to get big raises without hurting the boss's profits. But it also means the economy can produce more goods and services with fewer workers. A low rate of productivity growth can mean a sluggish economy and increased inflationary pressures. Unfortunately for those who want easy answers, productivity is extremely difficult to measure, particularly in the services. Most economists focus on the longer trend, rather than on the volatile quarterly numbers. Productivity averaged about 2.7% annually from 1948 to 1970, then slowed to 1.6% from 1971 to 1995. Since then, productivity has grown about 2.5% annually. In 2008, productivity increased 1.8%.

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