Real compensation in past year falls at fastest rate in 13 years WASHINGTON (MarketWatch) - U.S. firms cut back their employees' working hours in the third quarter at the fastest rate in six years, keeping productivity growth rising more than expected, according to Labor Department data released Thursday. Productivity in the nonfarm business sector increased at a 1.1% annual rate as output fell 1.7% and hours worked dropped 2.7%. The decline in output was the largest since the recession in 2001. Economists surveyed by MarketWatch expected productivity to increase at a 0.3% annual rate. Unit labor costs - a key gauge of inflationary pressures from labor markets - rose 3.6% compared with the 4.2% expected by economists. Real hourly compensation fell 1.9% in the quarter and is down 0.9% in the past year, the largest annual decline in 13 years. In the past year, productivity is up 2% and unit labor costs are up 2.3%. Hours worked are down 1.7%, and output is up 0.3%. Workers' real compensation has fallen over the past year, suggesting that workers were not able to demand higher wages to offset the higher prices they paid for energy and food. If employees don't get raises to match the increase in prices, the inflationary spiral is severed. In the manufacturing sector, productivity fell 1% in the third quarter, while unit labor costs jumped 6.1%. Output fell 5.8% (the biggest drop since 2001), while hours worked fell 4.9%. Real hourly compensation in manufacturing fell 1.6%. Productivity, a concept that's simple in theory but elusive in practice, is output divided by hours worked. Productivity gains are the key to higher living standards, higher wages, increased profits and low inflation. High productivity growth means the economy can grow rapidly without inflation, raising living standards and theoretically allowing workers to get big raises without hurting the boss's profits. But a low rate of productivity growth can mean a sluggish economy and increased inflationary pressures. Unfortunately for those who want easy answers, in practice productivity is extremely difficult to measure, particularly in the services. Most economists focus on the longer trend, rather than on the volatile quarterly numbers. Productivity averaged about 2.7% annually from 1948 to 1970, then slowed to 1.6% from 1971 to 1995. Since then, productivity has grown about 2.5% annually. In 2007, productivity increased 1.4%.

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