Productivity down 4.2%, largest decline in nearly 40 years

FILE - In this June 11, 2020 file photo, workers on scaffolding lay blocks on one of the larger buildings at a development site where various residential units and commercial sites are under construction in Cranberry Township, Butler County, Pa. U.S. productivity increased at a solid 4.6% pace in the July-September quarter, slightly below the initial estimate, while labor costs fell at a slower pace. The Labor Department reported that the third quarter increase in productivity was below the first estimate a month ago of a 4.9% increase. (AP Photo/Keith Srakocic, File) (Copyright 2020 The Associated Press. All rights reserved)

WASHINGTON – U.S. productivity fell at an annual rate of 4.2% in the fourth quarter, the largest quarterly decline in nearly four decades.

The revised figure released by the Labor Department Thursday was slightly smaller than the 4.7% decline estimated a month ago. But it was still the biggest drop since the second quarter of 1981, when productivity fell at a rate of 5.1%.

Labor costs rose at a 6% rate in the fourth quarter, slightly lower than the 6.8% first estimated.

Productivity is the amount of output per hour of work. The revisions reflected the fact that the government made changes to its estimate gross domestic product, the country's total output of goods and services, to show an increase of 4.1% at an annual rate in the fourth quarter, slightly higher than its initial estimate of 4% growth.

For all of 2020, productivity rose 2.5%, up from an annual gain of 1.8% in 2019. In recent years, productivity growth has been exceptionally weak and economists are uncertain about the cause. Analysts say that finding ways to boost productivity in coming years will be critical to raising living standards.

In the short term, productivity is likely to continue swinging wildly due to disruptions from the pandemic.

“The data have been distorted by the impact of COVID-19 on output, hours and compensation, a trend that is likely to continue in the near term,” said Rubeela Farooqi, chief U.S. economist at High Frequency Economics.

Some economists believe that once the country emerges from the pandemic, there may be a sustained and elevated levels of productivity, in part from workplace efficiencies gained from businesses finding ways to deal with the a year of related restrictions.