Update: Productivity Rose 5.3% in 2nd Quarter, Labor Costs Fell 0.1%

Updated from 9:49 a.m. EDT

U.S. workers sharply increased their productivity in the second quarter, easing labor costs for employers, the government reported Tuesday.

Worker productivity rose at a 5.3% annual rate in the latest quarter, compared with a revised rate of 1.9% for the first quarter, the Labor Department said.

The report suggests that the output of the average worker is rising faster than average wages. That trend is a phenomenon that has largely allowed the nation to experience historically low rates of unemployment without spurring inflation. That factor along with signs that certain sectors of the economy are slowing, may give Federal Reserve policymakers another reason to leave interest rates unchanged when they meet on Aug. 22.

In recent years, productivity has risen steeply as computer technology and other innovations for businesses allowed workers to do more work in the same amount of time. Alan Greenspan, the Federal Reserve's chairman, has said in recent congressional testimony that increased productivity is helping to restrain inflationary pressures, and that much of the gains in productivity could be nonreversible.

The second-quarter increase was larger than Wall Street expected. Economists surveyed by Reuters had been forecasting an increase of 4.3% in nonfarm productivity, which measures workers' output per hour, in the second quarter.

Moreover, the department said unit labor costs, a broad measure of how much businesses pay per unit of output, fell a surprising 0.1% in the second quarter after rising 1.9% in the first quarter. Economists had been expecting a 0.6% increase in the latest quarter.

The data should quell some economists concerns that tight labor markets could prompt workers to demand higher wages, spurring inflation as businesses raise prices to keep up with worker costs. Instead, the gains in productivity allow businesses to absorb wage increases without raising the price of goods and services they produce.

In a year-over-year comparison, productivity rose at a 5.1% annual rate in the second quarter, the biggest increase since the third quarter of 1983. And compared with the second quarter of 1999, unit labor costs fell 0.4%, the first year-over-year drop since the first quarter of 1984.

Hourly compensation rose 5.3% in the second quarter, compared to 3.9% in the first quarter. But adjusted for inflation, compensation rose only 1.6% vs. a flat reading in the first quarter.

Productivity growth for the manufacturing sector moderated in the second quarter, rising at a 5.1% rate vs. a 7.9% rate in the first quarter.

In the nonfinancial corporate sector, productivity increased 2.9%, slower than the 4.3% rise in the second quarter.