June 4 (Bloomberg) -- U.S. worker productivity rose more in the first quarter than previously estimated as the worst recession in at least half a century prompted companies to cut costs by extracting more output from remaining employees.

Productivity, a measure of worker output per hour, climbed at a 1.6 percent annual rate, more than forecast and double the 0.8 percent gain estimated last month, revised figures from the Labor Department showed today. Labor costs increased 3 percent after climbing 5.1 percent at the end of 2008.

Companies such as United Technologies Corp. are trying to ride out the slump by paring payrolls and hours to bolster profits. Improved productivity and earnings are a necessary step in getting the economy to pull out of the current downturn.

“Businesses are far advanced in their objective of cutting jobs and controlling labor costs,” said John Herrmann, chief economist at Herrmann Forecasting in Summit, New Jersey. “That suggests that the pace of job cuts should slow materially.”

Economists forecast productivity would rise at a 1.2 percent pace, according to the median of 59 forecasts in a Bloomberg News survey. Estimates ranged from increases of 0.3 percent to 2 percent. Efficiency dropped at a 0.6 pace in the last three months of 2008.

Unit labor costs, which are adjusted for efficiency gains, were projected to rise 2.9 percent.

Fewer Claims

Another report from Labor showed fewer Americans filed claims for unemployment benefits last week, signaling the most acute phase of job losses may be over even as hiring has yet to pick up. Initial jobless claims fell by 4,000 to 621,000 in the week ended May 30, in line with forecasts. The number of people collecting unemployment insurance fell for the first time in almost five months, breaking a string of 17 consecutive records.

The productivity report showed companies cut hours worked at a 9 percent pace, the biggest drop since 1975, exceeding a 7.6 percent drop in output.

Hourly pay adjusted for inflation rose at a 7.1 percent rate after jumping at a 14 percent pace the prior quarter, the report said.

Compared with the first quarter of 2008, productivity was up 1.9 percent. Efficiency has increased 2.5 percent on average since 1995. Labor costs were up 2.2 percent year-over-year, the biggest gain in almost two years.

Profits Rise

Improving productivity is already boosting the bottom line. Corporate profits, including estimates for the value of inventories and adjustments for capital investments, climbed 3.4 percent in the first quarter from the previous three months, the first gain in almost two years, the government said May 29.

Among manufacturers, productivity dropped at a 2.7 percent pace, less than the 4.6 percent decrease in the last three months of 2008.

A report tomorrow may show payrolls fell by about 520,000 workers in May and unemployment jumped to a 25-year high of 9.2 percent, according to economists surveyed. That compares with a 539,000 drop in employment the prior month.

The world’s largest economy has already lost 5.7 million jobs since the recession began in December 2007, making it the biggest employment slump in any postwar economic downturn.

As sales slowed, companies stepped up efforts to control expenses. United Technologies Corp., the maker of Pratt & Whitney jet engines, predicts annual savings of about $950 million from cost cuts made in 2008 and this year. United Technologies will have cut 18,000 jobs, or 8 percent of the global workforce, by the end of this year, Chief Executive Officer Louis Chenevert said during a May 19 presentation in Florida.

“Restructuring has, and will continue, to drive significant productivity improvement across UTC and it will make us more competitive when the economies recover,” Chenevert said.

To contact the reporter on this story: Bob Willis in Washington at bwillis@bloomberg.net

Last Updated: June 4, 2009 09:16 EDT