WASHINGTON, D.C.: U.S. worker productivity fell in the first quarter of the year for the first time in nearly three years, leading to a sharp increase in labor costs.

This could make it harder for businesses to stay profitable, especially as they also face higher costs from new tariffs.

The Labor Department reported that nonfarm productivity—measured as the amount of output a worker produces per hour—declined at an annual rate of 0.8 percent in the last quarter. This is the first drop since mid-2022 and follows stronger growth in the previous quarter.

Economists had expected a 0.7 percent drop. Compared to a year ago, productivity still rose by 1.4 percent.

Last week, the government reported the U.S. economy shrank slightly in the first quarter—its first decline in three years. This occurred partly because businesses rushed to import goods before President Trump’s new tariffs, including 145 percent duties on Chinese imports, took effect. These tariffs are expected to increase business costs.

Labor costs per unit of output increased by 5.7 percent in the first quarter, significantly higher than the two percent rise in the previous quarter. Economists had expected a 5.1 percent increase.

Hourly pay rose 4.8 percent, up from 3.7 percent the previous quarter, and was 2.7 percent higher than a year ago. Although the job market is slowing down, the Federal Reserve does not see it as a major driver of inflation for now.

The Fed kept interest rates steady between 4.25 percent and 4.50 percent but warned that the risks of both inflation and unemployment increasing have risen. The Fed aims to keep inflation around two percent.