us unit labor costs up 5 pc in past year at a 16 y

By Rex Nutting, MarketWatch
Last Update: 9:11 AM ET Sep 6, 2006


WASHINGTON (MarketWatch) -- U.S. workers have been more productive, but have also been paid more than previously believed, figures on Wednesday showed.
Revisions to quarterly nonfarm business productivity data show unit labor costs rose 5% in the past year, the fastest pace since 1990, the Labor Department reported.
Higher unit labor costs could fuel inflationary pressures as firms struggle to recover their labor costs. Unit labor costs had been subdued in the past few years, rising 2% in 2005 and 0.7% in 2004. Read the full government report.
Productivity increased 1.6% annualized in the second quarter, up from 1.1% reported a month ago. Unit labor costs increased 4.9% annualized, revised from 4.2% earlier. Real hourly compensation increased 1.6% annualized.
"Maybe the problem is even worse than we thought (and we have been worry-warts on this subject)," said Robert Brusca, head of FAO Economics. "I do not think the productivity revision is good enough news to dominate the wage acceleration news embedded in this report."
Economists were expecting productivity to be revised up to 1.5% and unit labor costs to be unrevised at 4.2%, according to a survey conducted by MarketWatch. See Economic Calendar.
Markets took the news relatively calmly. Stock futures and bonds fell, while the dollar strengthened, then pulled back. See Indications.
But the big revisions came in the first quarter with the introduction of updated data on compensation. Unit labor costs rose a staggering 9.0% annualized in the first quarter, the most since the third quarter of 2001.
In the past year, productivity of the nonfarm business sector increased 2.5%, while real hourly compensation increased 3.6%. Unit labor costs rose 5% in the past year. A month ago, the government was reporting that unit labor costs had risen 3.2% in the past year.
The revisions to the second-quarter data reflect new estimates of output, hours worked and compensation. The revisions to the first quarter mainly reflect better estimates of compensation, which was higher than initially reported.
Productivity, defined as output per hour worked, is perhaps the most important long-term variable in economics. But it also the most difficult to define and to measure.
Higher productivity can mean higher profits, wages and living standards. Productivity gains reduce inflationary pressures. But the concept is difficult to measure, especially in financial services where the concept of a "unit" of output is murky.
Therefore, Fed officials watch nonfinancial productivity most carefully.
Productivity in the nonfinancial corporate sector increased at a 2.2% annual pace in the second quarter, while unit labor costs increased 4.2% annualized. Real hourly compensation in the nonfinancial corporate sector rose 1.4%. Unit profits fell 1.2% in the second quarter.
In the first quarter, revisions show nonfinancial productivity increased a stunning 11.1%, the most since 1971. Unit labor costs increased 1.2% in the nonfinancial sector, compared with 9% in the nonfarm business sector as a whole.
In the past year, productivity in the nonfinancial corporate sector rose 4.8%, unit labor costs rose 2.6% and real hourly compensation increased 3.4%. Unit profits are up 8.4% in the past year, a reflection of the favorable environment for profits.
Rex Nutting is Washington bureau chief of MarketWatch.