The report also said unit labor costs jumped by a 5.2% rate in the first quarter. That’s the biggest increase since the fourth quarter of 1997, when they rose at a 5.5% rate.
The drop in productivity — the amount of output per hour of work — during the January-March quarter surprised analysts, who generally were expecting an increase of 1% at an annual rate.
Gains in productivity are the key to rising living standards because they allow wages to increase without triggering higher inflation that would eat up those wage gains. However, if productivity falters, pressures for higher wages sometimes force companies to raise prices, causing inflation to kick in.