U.S. Worker Productivity Slips in Final Months of 2017

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WASHINGTON—U.S. worker productivity stumbled at the end of 2017 after solid gains earlier in the year.

Nonfarm business-sector productivity, measured as the goods and services produced per hour worked, decreased at a 0.1% seasonally adjusted annual rate in the fourth quarter of 2017, the Labor Department said Thursday. It was the first quarterly decline since early 2016. Economists surveyed by The Wall Street Journal had expected a 0.6% growth rate for the latest quarter.

The productivity decrease reflected a less robust increase in output and a strong gain in hours worked.

Productivity growth in the third quarter was revised down to a 2.7% rate an earlier estimate of up 3%.

For all of 2017, productivity improved 1.2% from the prior year. That matched the average rate recorded from 2007 through 2017, and is well below the 2.1% annual rate averaged since 1947.

Weak productivity gains may have made it difficult for businesses to justify larger pay increases for workers last year. If individual workers can’t produce more, firms may opt to add more employees rather than give current staff raises. That’s consistent with recent solid hiring and sluggish wage gains.

Productivity in the third quarter had accelerated to the best pace since early 2015. That coincided with the best rate of economic growth–3.2%–since 2014. Last quarter, gross domestic product expanded at a 2.6% annual rate, the Commerce Department said last week.

If the U.S. economy is to maintain a growth rate above the roughly 2% pace averaged since the recession ended, worker productivity would need to grow. The historically low unemployment rate and older Americans retiring in greater numbers limit growth in the labor force. That puts the burden on existing workers to produce more.

Thursday’s report showed unit labor costs at nonfarm businesses rose at a 2% rate in the fourth quarter, primary due to an increase in hourly compensation. Economists had expected a 1% growth pace. Unit labor costs are the ratio of hourly pay to productivity. Unit labor costs rose 0.2% for the full year.

Productivity for manufacturing firms rose at a 5.7% pace in the fourth quarter from the third. That was offset by a decline in worker productivity at other businesses.

Write to Eric Morath at eric.morath@wsj.com and Sharon Nunn at sharon.nunn@wsj.com

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