U.S. productivity rose at annual rate of 1.8% in Q1, up from earlier estimate of 1.6%, lower than 2.9% increase the previous quarter, as employers reach limits on how much they can get from existing workforces: U.S. Dept. of Labor

WASHINGTON , June 2, 2011 () – U.S. companies squeezed more work out of their staffs in the first three months of the year. But the gain was much slower than in the previous three months, suggesting many employers will need to hire more workers if they want to produce more goods and services.

The Labor Department said Thursday that productivity rose at an annual rate of 1.8 percent in the January-March period. That was slightly faster than an earlier estimate of 1.6 percent, but significantly lower than the 2.9 percent increase in the October-December period. Unit labor costs rose at a 0.7 percent rate, down from an initial estimate of 1 percent growth.

The revisions reflected more non-farm business output than previously believed while the drop in unit labor costs reflected lower compensation costs per hour of work.

Productivity grew 3.9 percent in 2010, the biggest increase in eight years, but many economists believe it will slow to just half that pace this year.

Productivity is a measure of the amount of output per hour of work. A slowdown in productivity growth is bad for the economy if it persists for a long period. But it can be good in the short term when unemployment is high.

Economists believe that companies are reaching the limits on how much extra output they can get from their existing work forces. The expectation is that they will have to begin hiring more workers in order to boost output further.

Job growth has been strong in recent months. It's averaged a net total of 233,000 per month since February. And the unemployment rate has tumbled from 9.8 percent in November to 9 percent in April.

Still, high energy prices and harsh winter weather slowed economic growth in the first three months of the year. And weaker economic data over the past month have led many economists to lower their forecasts for May job growth. That figure will be reported on Friday.

Companies found ways during the recession to produce more goods and services with fewer workers. They slashed millions of jobs during the downturn.

The Federal Reserve watches productivity and unit labor costs carefully. Increases in productivity allow companies to pay workers more without being forced to boost the prices of their products, which can cause inflation.

Because of the high levels of unemployment, workers have not had the bargaining power to demand higher wages. Unit labor costs have fallen for two consecutive rises. Even though analysts are looking for an increase in labor costs this year, they believe it will be a moderate advance that will not raise alarms that inflation pressures are getting out of hand.

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