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U.S. workers were more productive in the April-June quarter and labour costs rose slightly, a sharp turnaround from grim first-quarter figures.

The Labor Department said Friday that that productivity increased 2.5% at a seasonally adjusted annual rate, after plummeting 4.5% in the first quarter. That was the steepest drop in 31 years, and reflected a sharp 2.1% contraction in the economy. Economists blamed most of that shrinkage on temporary factors, such as harsh weather and a cutback in stockpiling by businesses.

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Productivity measures output per hour of work. Greater productivity increases living standards because it enables companies to pay their workers more without having to increase prices, which can boost inflation.

Labour costs rose just 0.6%, after surging 11.8% in the first quarter. But labour costs shrank in the second half of last year and in the past 12 months have increased just 1.9%. That is below the long-run average of 2.8% and suggests that wages and salaries aren’t rising fast enough to spur inflation.

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The Federal Reserve keeps close watch on productivity and labour costs for any signs that inflation may be accelerating.

Despite the first quarter increase, labour cost gains have been tame throughout most of the recovery. Wages for most workers have barely kept up with inflation since the recession ended.

In the past 12 months, productivity has increased 1.2%, below the long-run average of 2.2%.

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Productivity growth has been weak in the five years since the recession ended. That has raised concerns among some analysts that the U.S. economy may not be able to grow as quickly as it has in the past.

Productivity grew just 0.9% in 2013, 1% in 2012 and just 0.1% in 2011, according to revised figures released Friday.

In the short run, slow productivity can boost hiring. That’s because companies need to hire more workers to lift output. Employers have added an average of 244,000 jobs a month in the last six months, the best six-month pace in eight years.

Originally published on Advisor.ca

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