Productivity Jump Jeopardizes Job Creation

(WASHINGTON) — Companies across the economy are finding ways to do more with fewer workers, dimming hopes that hiring will take off anytime soon.

Employers became leaner and more efficient in the third quarter. Wages, meantime, remain flat or falling. The result is that productivity — output per hour of work — jumped at the fastest pace in six years.

The good news for companies, though, is bad news for the jobless. As long as companies can get their workers to produce more, they have little reason to hire — at least until consumer spending picks up. And the squeeze on incomes could depress consumer spending, putting the economic recovery at risk. (See "Out of Work in America.")

Productivity rose at an annual rate of 9.5 percent in the July-September quarter, the Labor Department said Thursday. That was much better than the 6.4 percent gain economists had expected. Unit labor costs fell at a 5.2 percent rate.

The productivity rise, which followed a 6.9 percent surge in the second quarter, was the fastest advance since a 9.7 percent increase in the third quarter of 2003.

The gain reflected the fact that the overall economy, as measured by the gross domestic product, grew for the first time in a year — at an annual rate of 3.5 percent. The higher output came as companies continued to lay off workers. That meant employers produced more output with fewer workers.

The 5.2 percent drop in unit labor costs in the third quarter marked the third straight decline and was larger than the 4 percent decrease economists were expecting. Read "How to Know When the Economy Is Turning Up."

Productivity is the key ingredient to rising living standards. It lets companies pay their workers higher wages. The increases are financed by the increased output rather than higher costs for products.

But companies this year, struggling to cope with the longest recession since the 1930s, have boosted output while continuing to lay off workers. The falling labor costs also reflect that many workers still fortunate enough to have jobs have seen their wages squeezed as companies struggle to bolster their bottom lines.

While economists believe the recession has ended, the unemployment rate likely will keep rising until next summer. The jobless rate hit a 26-year high of 9.8 percent in September and economists predict it will edge up to 9.9 percent when the October number is released on Friday.

Many analysts expect the jobless rate could rise as high as 10.5 percent before the recovery gains enough steam to start pushing it down next summer.

The concern is that consumer spending, which accounts for 70 percent of economic activity, could falter in coming months if households continue to be squeezed by layoffs, stagnant wages and depleted savings. See 10 things to buy during the recession.

However, the Federal Reserve pledged at the conclusion of its latest a two-day meeting Wednesday to continue to keep interest rates low for an "extended period," a commitment they can make because wage and general inflation pressures have vanished during the steep downturn.

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