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Businesses Thrive On Productivity Gains

New statistics showing that American workers are churning out goods and services with record efficiency reflect the new way today's companies do business, CBS News Correspondent Anthony Mason reports.

According to Labor Department figures released Tuesday, the productivity of American workers surged at a 6.4 percent rate in the final three months of 1999, marking the strongest jump in productivity growth in seven years, the government reported Tuesday.

That revised estimate made productivity growth for all of last year the best showing on workers' efficiency gains since a 4.1 percent increase in 1992.

The new fourth-quarter estimate marked the biggest leap in productivity growth since a 7.4 percent rate of increase at the end of 1992. It also was in line with the 6.5 percent rate many analysts were forecasting.

In the third quarter, productivity grew at a sizzling five percent rate.

A number of vibrant companies using technology to increase efficiency are working examples of these productivity gains.

At the "Freemarkets" site, based in Pittsburgh, productivity is embodied in a business-to-business auction. Companies bid down the price to sell each other everything from shipping pallets to circuit boards.

"One supplier bids a million dollars —I'll do that for a million dollars," said Freemarkets CEO Glen Meakem. "Another one comes back I'll do it for 995. Another comes back I'll do it for 990...985."

"We're doing things that human beings could not have done without the technology," Meakem said.

When Pittsburgh's Allegheny Ludlum needed a key component to make stainless steel, instead of calling a few suppliers, they put the contract up for auction at Freemarkets.

Allegheny CEO Richard Simmons watches the bids come in, the price go down and his company save money.

"We couldn't do it before. Because it was impossible, no matter how good our purchasing department was," said Simmons.

Now at Allegheny Ludlum, they can produce more stainless steel for less money and productivity rises.

That's why economists consider healthy productivity gains the key to prosperity and rising living standards.

Sizable gains mean companies can pay employees more, hold the line on prices and still deliver increased profits to shareholders. Computers, satellites and other technological advances are credited with helping to boost workers' productivity.

While Freemarkets and other business-to-business auction sites offer companies the chance to get bids from all over the world, Internet consultant David Pecaut tells CBS Newsthe Internet will even enhance productivity by changing the way a company orders office supplies.

When that transition to cyber-shopping occurs, "you lose the paper handling, the filling out of forms, the purchase order and so on," Pecaut said, "and in the early results it looks like about 65 percent of the transaction costs can comout if you do the business over the Internet."

Simmons agrees. "It's gonna change the way we do business. The way our customers do business. And the way our suppliers do business. Business will never be the same."

Nor will the economy, some say — it'll be more efficient because businesses around the world will be able connect at no cost, making for better matches between buyers and sellers.

"An executive sitting in their office in Chicago can be bidding in real time against somebody in their office in Singapore," explained Meakem.

The recent numbers are part of a trend. An upturn in productivity since 1996 has left some analysts believing that huge business investments in computers are finally beginning to pay off and the country is in a new economic era that will be marked by stronger productivity gains.

If productivity falters, however, pressures for higher wages could force companies to raise their prices sharply, thus triggering inflation.

For the fourth quarter, unit labor costs — a key barometer of underlying inflation pressures — fell by a 2.5 percent rate, the steepest decline since a 3.9 percent rate of decrease in the fourth quarter of 1992. That means the costs of producing a particular piece of merchandise fell.

The performance of unit labor costs is important because the bulk of U.S. companies' expenses involve paying for wages, benefits and other labor-related items.

Since they mean workers can produce more in less time, the new productivity numbers may weaken the case for a hike in interest rates.

On Monday, Fed Chairman Alan Greenspan expressed new worries about an overheated economy and sounded a warning that interest rates will be headed higher if the economy doesn't slow. Blue Chip stocks plunged Monday and Tuesday.

Still, the productivity and wage growth figures aren't hailed by everyone. Indeed, the fact that workers are increasing the amount they produce at a record pace while their wages increase only slightly is taken by some as a signal that workers are doing more for less.

A February report by the Economic Policy Institute and the Center on Budget and Policy Priorities found that the income gap between affluent and poor families has grown in the current economic expansion.

In the 1990s, middle-class incomes grew only 2 percent (adjusting for inflation), while the average income of the top 5 percent grew by 27 percent.

However, EPI, a Washington-based think tank, does acknowledge that the current expansion and its low unemployment has been beneficial even at the lower rungs of the economic ladder. "Clearly," an EPI report reads, "the tight labor market has increased the demand for less-educated workers."