U.S. non-farm productivity growth slowed sharply in the first quarter, government data showed on Thursday, suggesting businesses will have to raise employment to boost output.

The Labor Department said non-farm productivity rose at a 3.6 percent annual rate, the smallest advance in a year, after expanding at a brisk 6.3 percent pace in the fourth quarter.

Analysts polled by Reuters had forecast productivity, which measures the hourly output per worker, rising at a 2.5 percent rate in the January-March period.

Productivity expanded rapidly in the previous three quarters as businesses wrung more output from a small pool of labor. Despite the resumption of economic growth, firms have been reluctant to hire new workers, opting instead to increase working hours. With productivity slowing, they may need to start hiring workers to keep production up.

The economy grew at an annual pace of 3.2 percent in the first quarter slowing from a 5.6 percent inventory-induced spurt in the fourth quarter.

Total non-farm output grew at a 4.4 percent rate in the January-March period after a robust 7.0 percent pace in the fourth quarter, the Labor Department said. Hours worked edged up at a 0.8 percent rate, the highest since the second quarter of 2007, from 0.7 percent in the fourth quarter.

Unit labor costs, a gauge of inflation and profit pressures closely watched by the Federal Reserve, fell 1.6 percent after dropping 5.6 percent in the fourth quarter.

While the first-quarter decline in unit labor costs was smaller than the previous quarter, it still pointed to muted inflation pressures and bodes well for the U.S. central bank's pledge to keep interest rates low for an extended period to aid the economic recovery. Analysts had expected unit labor costs to fall 0.7 percent in the first quarter

(Reporting by Lucia Mutikani; Editing by Andrea Ricci)

Manufacturing