The nation's 5.8 percent unemployment rate for civilian workers can be gradually reduced "without an increase in inflationary pressures," the president's Council of Economic Advisers said yesterday in its annual report, and predicted that would begin to happen in 1989 when faster economic growth resumes.
The report said there is "little evidence of an acceleration of inflation" following a substantial drop in the unemployment rate by about 1 percentage point last year. "Recent data provide little evidence of a tradeoff between inflation and unemployment," the council declared.
With the unemployment rate at its lowest level since 1979, the issue of a tradeoff has become important. If one exists, as most economists believe is the case, then economic policy makers could soon face the choice of curtailing economic growth to keep unemployment from falling further or triggering a new acceleration of inflation.
The issue has been moot in recent years, when unemployment was clearly too high to trigger more rapidly rising wages, higher unit labor costs and more inflation. In 1987, however, unemployment dropped by nearly a full percentage point, considerably faster than most economists, including those at the CEA, had expected.
The current report is the first one issued during the Reagan administration to project an unemployment rate for any future year that is below 5.5 percent. That rate is predicted to be reached in the fourth quarter of next year.
In its latest forecast, the Reagan administration expects the civilian unemployment rate to tick upward to 5.9 percent and remain there throughout this year as the pace of the economic expansion slows somewhat compared with that of 1987. Forecast details obtained by The Washington Post show that the gross national product, adjusted for inflation, is supposed to grow at a 2.5 percent annual rate this quarter, at a 2 percent rate in the second quarter and at 2.5 percent again in the third and fourth quarters.
On a fourth-quarter-to-fourth-quarter basis, real GNP is forecast to rise 2.4 percent this year following a 3.8 percent gain in 1987. However, on a year-over-year basis, the increase for both years is put at 2.9 percent, almost the same as the 3 percent rise in 1985.
During 1989, the fourth-quarter-to-fourth quarter increase in the output of real goods and services is supposed to accelerate to 3.5 percent, which would boost the annual figure for real GNP by 3.1 percent over 1988. Civilian unemployment would drop to 5.5 percent by the fourth quarter of next year.
While the CEA report said this could be accomplished without an acceleration of inflation, the actual numbers for 1986 and 1987 combined with those forecast for 1988 and 1989 nevertheless show a steady upward progression in inflation, according to at least one measure, the GNP deflator. The deflator went up 2.6 percent and 3 percent in 1986 and 1987, respectively, and is predicted to go up 3.5 percent this year and 3.8 percent in 1989.
The report also includes figures showing that worker compensation per hour at private businesses other than farms, which went up 3.9 percent in 1986 and 2.8 percent last year, is forecast to jump 4.7 percent this year and go up slightly faster than that in 1989.
Some private economists, but by no means all of them, are considerably more worried than is the CEA that tighter labor markets will mean higher inflation. For one thing, these skeptics believe workers will soon begin to try to make up for the 0.8 percent decline in real compensation they suffered last year and the predicted -- by the CEA -- failure of real compensation to go up this year.
Moreover, the CEA, which in the past has argued that labor productivity tends to rise when the rate of increase in real GNP speeds up, as it did in 1987, expects productivity growth in 1988 at least to match last year's 1.4 percent gain and thus offset part of the higher cost of labor.
If productivity growth slips or wages go up faster than the CEA predicts, unit labor costs will also go up faster -- and so may prices, which usually are strongly influenced by unit labor costs.
Alternatively, if productivity growth slips this year or next, and the CEA predictions about the rate at which real GNP rises still turn out to be correct, there could be another surprise on the unemployment front. With a smaller increase in productivity -- output per hour worked -- more people at work would be needed to achieve the specified economic growth and the unemployment rate could again fall faster than expected.