ECONOMIC

wage rate change during the first 3 quarters of 1976 was 7.9 percent at anannual rate, and was smaller than the increase in 1975 both because oflower first-year settlements and because the lower rate of inflation resultedin smaller cost-of-living adjustments.PRODUCTIVITY AND UNIT LABOR COSTSLabor productivity, or output per hour of work, increased by 4 percentin 1976 reflecting the cyclical improvement in the economy (See Table11). Labor productivity rises sharply in the trough quarter of most recessionsor in the following quarter and remains substantially above the trendgrowth rate for the first 2 or 3 quarters of recovery. Perhaps becauseof the severity of the 1974-75 recession, labor productivity growth wasabove the trend rate for 1976 as a whole.Both the slowdown in compensation per hour and the rise in productivitycontributed to a sharp deceleration in the rate of increase in unitlabor costs last year (see Table 11). The rate of increase in unit labor costsin 1976 is consistent with further declines in the rate of inflation. However,as the economic recovery continues and the rate of growth in productivitysettles to its long-run trend, unit labor costs will rise more rapidly unlessthe growth rate of nominal compensation per hour continues to fall.CORPORATE PROFITABILITYPretax corporate profits were up 30 percent last year to about $149 billion.Inflation-based adjustments for inventory appreciation and for depreciationbased on replacment cost increased moderately from 1975, andhence the rise in NIPA profits was also 30 percent. Inventory appreciationrose about $3 billion. The excess of the depreciation based on replacementcosts used in the NIPA over the book depreciation that is still basedon historical costs grew by $4 billion, about half of the 1975 increase. Theslower rise of the excess of NIPA depreciation over book depreciation wasdue to the substantial deceleration of the rise in prices of investment goodslast year.Last year's sharp growth in profits was a typical cyclical increase reflectingthe marked rise in output and productivity characteristic of the early partof a business cycle recovery. Although productivity in the corporate sector,as in the economy as a whole, rose about 4 percent in 1976, the rate of increasehad tapered off to under a 3 percent annual rate in the second half.This moderation, in combination with current rates of increase in compensationper hour of labor of 7/ 2 to 8 percent, means that the normal cyclicalincrease of the share of profits in gross product has now tapered off.The share of after-tax operating profits in the net domestic product ofnonfinancial corporate business exceeded 5 percent in the second half of1976 after reaching a cyclical low of 1 percent in the third quarter of 1974(Table 13). Because of the large increase in debt financing in the past 15years, it is more revealing to examine the share of corporate income accruingto holders of both equity and liabilities. This share is measured by net interest68