Long Term Perspective
While accelerating wage gains could lead to consumer price increases, it is important to look at the link in between -- productivity. Productivity gains allow wages to increase without generating inflationary pressures. Note how sharp productivity increases since 1996 were associated with only modest gains in unit labor costs. The latest recovery had low job gains ("the jobless recovery") partly due to the sharp productivity gains between 2002 and 2004. Productivity gains were more moderate in 2005 and have fallen in 2006. While productivity growth is a good long-term factor for economic prosperity, it is not helpful to the labor market in the short run when fewer workers are necessary to get the job done!

Unit labor costs are also important for Fed officials. They tend to run inversely to productivity. That is, when productivity increases, unit labor costs decline and vice versa.

Short Term Perspective
Nonfarm productivity rose at a 1.6 percent rate in the third quarter of 2006 after posting a moderately stronger 2.4 percent gain previous quarter. The slowing productivity growth was due to a sharp deceleration in output growth.

Unit labor costs increased at a 2.9 percent rate in the third quarter, marginally less than in the prior quarter. Overall compensation costs had decelerated in the third quarter to 4.3 percent annualized from 5.6 percent in the prior quarter.