Productivity slows, labor costs rise

NEW YORK (CNNMoney.com) -- Readings on worker productivity and labor costs in the final three months of 2007 were both revised higher, according to a government report Wednesday.

The Labor Department said productivity rose at a rate of 1.9% in the fourth quarter, up from an initial reading of 1.8%

Economists surveyed by Briefing.com had expected the reading to remain unchanged.

The revised growth rate is still sharply lower than the 6.3% productivity growth rate posted in the third quarter of last year.

"These numbers are consistent with the current economic environment that we are seeing - an economy that continues to moderate," Sam Bullard, an economist with Wachovia, said.

Unit labor costs, a measure of how much companies pay workers for each unit of output they produce, was revised to 2.6%, up from 2.1%.

The rise in labor costs, driven by upward revisions in hourly compensation, more than offset productivity increases, the Labor Department said.

Rising wages can increase inflationary pressure, but while labor costs were revised higher for the quarter, the rise in 2007 was modest, according to Nigel Gault, chief U.S. economist at research firm Global Insight.

"As long wages stay under control, inflation is not going to be able to get out of control like it did in the 1970s," Gault said.

Worker productivity measures the output per hour of work. An increase in productivity is a good sign for the economy because it allows businesses to pay their workers more for their increased output, without raising the cost of their products.