updated 5/7/2008 8:57:01 AM ET 2008-05-07T12:57:01

Worker productivity rose by a better-than-expected amount in the first three months of the year while labor cost pressures eased.

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The Labor Department reported Wednesday that productivity, the amount of output per hour of work, increased at an annual rate of 2.2 percent in the first quarter. That was slightly higher than the 1.5 percent increase which had been expected.

In a sign that inflation could be easing, labor cost pressures slowed a bit. Unit labor costs rose at an annual rate of 2.2 percent, down from a 2.8 percent rise in the final three months of last year.

While rising wages and benefits are good for employees, those increases can lead to higher inflation if businesses are forced forced to boost the cost of their products to cover the higher payroll costs.

However, if productivity is increasing it allows businesses to finance higher wages out of the increased output.

The Federal Reserve, which is always on guard about the threat of inflation, closely monitors developments in productivity since wage pressures are often the key way that inflation gets out of control.

The Fed last week boosted a key interest rate for the seventh time since September, but the increase was a smaller quarter-point move and the Fed signaled that it may pause its rate cutting campaign in part because of concerns about inflation.

Analysts read the bigger-than-expected rise in productivity and the smaller increase in unit labor costs as a good sign that inflation pressures, at least on the labor front, are remaining under control and the country is not facing the danger of any type of wage-price spiral.

“There is certainly nothing to worry about here from a cost-push inflation perspective,” said Ian Shepherdson, chief U.S. economist at High Frequency Economics.

Many analysts think that the country has already toppled into a recession. But overall economic growth, as measured by the gross domestic product, eked out a tiny 0.6 percent rate of increase in the first three months of the year, the same anemic pace as the final three months of last year.

The rise in productivity in the first three months of the year occurred as the number of hours worked declined at an annual rate of 1.8 percent.

That reflected layoffs that have been occurring as businesses have cutback on their payrolls in the face of an economic slowdown that has been triggered by a steep slump in housing and a severe credit crunch that has resulted in billions of dollars of losses from financial firms.

The 2.2 percent rate of productivity growth in the first quarter was up slightly from a 1.8 percent increase in the fourth quarter of last year.

Productivity for all of 2007 rose by 1.8 percent, up a bit from the 1 percent gain in 2006. However, both of those increases were far below the growth levels of the past decade as productivity experienced a healthy rebound, reflecting all the investments that had been made in productivity-enhancing equipment such as computers.

Copyright 2008 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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