updated 3/3/2005 8:48:55 AM ET 2005-03-03T13:48:55

The productivity of American workers rose at an annual rate of 2.1 percent in the final three months of last year, sharply higher than originally believed.

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The Labor Department had initially reported a month ago that productivity — the amount of output per hour of work — had risen by just 0.8 percent in the October-December quarter, a figure that had jolted financial markets because it raised worries that inflation pressures could be mounting.

The better-than-expected 2.1 percent revised estimate for productivity left this indicator for all of 2004 rising by 4 percent, the department said Thursday, capping the strongest three-year period for productivity growth in more than a half-century of record keeping.

Productivity is the key component for rising living standards.

In a separate report, the department said the number of Americans filing first-time claims for unemployment benefits dipped by 1,000 last week to a seasonally adjusted 310,000.

It marked the fourth decline in jobless claims in the past five weeks and pushed the four-week moving average for new claims down to 307,000. That was the lowest level since the week of Oct. 28, 2000 when the country was in the final year of a record-breaking 10-year long economic expansion.

The declining level of jobless claims provided a strong signal that the labor market is continuing to improve. Economists predicted that Friday’s employment report will show a pickup in the number of new jobs being created, to an expected 245,000 in February, up sharply from the 146,000 jobs created in January. They are forecasting the unemployment rate will remain unchanged at 5.2 percent.

Productivity allows businesses to pay workers more for their increased output without having to raise the price of their products.

The upward revision to a 2.1 percent growth rate for productivity in the fourth quarter reflected stronger growth in output than originally estimated. The government last week revised its estimate for growth in the gross domestic product — the country’s total output of goods and services to an annual rate of 3.8 percent in the fourth quarter, up from an original estimate of 3.1 percent.

The 2.1 percent increase for productivity in the fourth quarter followed a much slower 1.3 percent productivity increase in the third quarter. Both quarters reflected a slowdown from productivity increases at a rate of 3.8 percent in the first quarter and 3.9 percent in the second quarter of last year.

For all of 2004, productivity rose by 4 percent following gains of 4.4 percent in 2003 and 4.3 percent in 2001. The average gain in productivity over the past three years has been 4.3 percent, the best on record.

The strong gains in productivity, while laying the groundwork for rising living standards, do come with a cost. Businesses have obtained the productivity increases by getting more work from their current work force, rather than hiring new workers.

However, economists believe that businesses are running out of room to boost output in this way and are starting to hire more workers, a development that has helped to end a prolonged period of weak job growth.

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