US worker output rises at best pace in 4 years

The Labor Department said Monday that productivity increased at a 3 percent annual rate in the third quarter. That's up from an initial estimate of 1.9 percent and much stronger than the 1.8 percent rate from April through June.

Productivity rose because economic growth was much stronger than previously estimated in the third quarter. Productivity is the amount of output per hour of work.

Labor costs fell in the third quarter, evidence that inflation will remain low.

Higher productivity enables companies to pay employees more without sparking inflation. But greater productivity can also slow hiring if it shows companies don't need more workers to boost output.

However, productivity growth has been mostly flat over the past year. That's because the gains from the past six months have been offset by declines in previous six months.

Worker productivity is improving along with economic growth. Hiring has accelerated since the summer and wages are gradually rising. The economy grew a 3.6 percent annual rate in the third quarter, much faster than the 2.8 percent rate previously estimated.

But productivity gains have slowed in the past three years after jumping in the aftermath of the recession. Worker productivity grew just 1.5 percent in 2012 and 0.5 percent in 2011. Those gains followed much healthier increases of 3.3 percent in 2010 and 3.2 percent in 2009. But productivity improved because companies ramped up output after having laid off many workers during the Great Recession.

The Federal Reserve monitors productivity and labor costs for any signs that inflation could pick up. Mild inflation has allowed the Fed to keep short-term interest rates at record lows and to buy bonds to try to keep long-term rates down. Fed officials meet Tuesday and Wednesday to assess their stimulus policies.