Productivity growth posted a better-than-expected gain in the first three months of the year while labor costs dropped more than expected. That combination is good for corporate profits but means household incomes continue to be squeezed, putting the economic recovery at risk.

The Labor Department said Thursday that productivity grew at an annual rate of 3.6 percent in the first quarter. That was better than the 2.5-percent increase economists had expected.

Unit labor costs dropped at an annual rate of 1.6 percent, a bigger decline than the 0.7 percent forecast. It marked the third straight quarterly decline, underscoring how much a severe recession has dampened wage pressures.

A second report Thursday showed the job market is slowly improving. The Labor Department said applications for unemployment benefits dropped for a third straight week, decreasing by 7,000, to 444,000.

Economists believe the April jobless number, which is to be released Friday, will show unemployment stuck at 9.7 percent for a fourth straight month.

The economy has been growing since last summer, but firms have been reluctant to hire back workers. They are instead opting to push their slimmed-down work forces to produce more.

That has translated into a surge in productivity. It grew at annual rates of 7.6 percent, 7.8 percent and 6.3 percent in the second, third and fourth quarters of last year.

The 3.6-percent rise in productivity for the first three months of this year marked a drop from the rates turned in over the last three quarters. That is something that economists expect will occur as companies reach the limit of how much they can expand output without hiring more workers.

However, that change is viewed as a necessary development for a sustained recovery because rehiring workers would boost overall incomes. That allows them to increase consumer spending, which accounts for 70 percent of economic activity. The concern is that unless incomes start rising, consumer spending will not expand and the recovery could falter.

The 1.6-percent fall in unit labor costs followed declines of 5.6 percent in the fourth quarter and 7.6 percent in the third quarter. That indicates the deep recession has banished wage pressures for the moment.

For all of 2009, productivity, the amount of output per hour of work, rose at a 3.7-percent rate, nearly double the 2-percent increase in 2008. It was the fastest annual increase in productivity in seven years.