Productivity, or output divided by hours worked, in the US non-farm business sector increased to a 3.2% annual rate over the last three months of the year, according to the Bureau of Labor Statistics. This number is a huge positive, since economists had forecast a much smaller 1.1% increase, but it is probably due to the fact that U.S. firms have cut back their employees’ working hours, keeping productivity growth rising faster than expected. Hours worked dropped 8.4% in the 4th quarter, the weakest since 1975. And output, the other variable to the equation, fell 5.5%, the largest since 1982.

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Productivity is important because it increases profit margins and real wages, since more is being produced with less. This, in turn, becomes a key deterrent of inflation and promotes a higher standard of living.

High productivity growth means the economy can grow rapidly without inflation, raising living standards and theoretically allowing workers to get big raises without hurting company profits.
But a low rate of productivity growth can mean a sluggish economy and increased inflationary pressures.-MarketWatch

For the full year, productivity increased 2.8%, the fastest since 2003, compared with a average annual rate increase of 2.5% from 2000-2007. Productivity averaged about 2.2% annually from 1947 to 2008.

Unit labor costs, a key measure of inflation, came in at 1.8% annualized rate for the quarter. Economists forecasted a number closer to 2.9%. In the last year, unit labor costs have increased only 0.5%.

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Report Details

[For all of 2008] hours worked are down 1.0% and output is up 1.0%.

In the manufacturing sector, productivity fell 3.0% in the fourth quarter, while unit labor costs jumped 13.3%.

Manufacturing output fell 16.7%, the biggest drop on record, while hours worked decreased by a record 14.1%.

Real hourly compensation rose a record 15.6% in the quarter and is down 0.4% in the past year.

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