The productivity of American workers showed a smaller-than-expected increase in the first quarter, raising concerns that a tight labor market will add more upward pressure to labor costs. Productivity at non-farm U.S. businesses increased at a 2.4% annual rate in the first quarter, well below both the 6.9% increase in the fourth quarter and the 3.0% gain that economists had expected. The first-quarter productivity increase was the smallest since the second quarter of last year. Productivity, which measures output per hour of work, is considered a crucial element in raising living standards without spurring inflation. Increased productivity allows companies to produce more, sell more, and pay their workers more, without having to increase prices. Unit labor costs, which measure changes in compensation and productivity, rose by 1.8 percent in the first quarter, partially reversing a 2.9% fall in the fourth quarter. The increase in labor costs was also the first since the second quarter of 1999. Federal Reserve Chairman Alan Greenspan has said that strong productivity growth is one reason why the rapid growth of the U.S. economy has not triggered an acceleration in inflation. A slowdown in productivity, therefore, could prompt the Fed to raise interest rates more aggressively. However, Kevin Logan, senior economist at Dresdner Kleinwort Benson, notes that on a year-over-year basis, productivity was up 3.7% and unit labor costs up just 0.7%. "When you look at it on a year-over-year basis, it tells a very good story, with some moderation in the growth in compensation and a slowdown in the growth of unit labor costs," he said. "One can't look at this data and say there's an incipient labor cost problem."