The Trendlines column in yesterday's Business section incorrectly characterized a statement by Federal Reserve Chairman Alan Greenspan on wages and inflation. Greenspan warned that further declines in the pool of available workers could lead to wage increases above the rate of productivity growth. (Published 09/29/99)
Perhaps the greatest surprise of the economic expansion that began in 1991 has been the failure of inflation to rise once the nation's unemployment rate dipped under 6 percent. Many economists were convinced by history that falling under that threshold would cause inflation to accelerate.
Unemployment fell below 6 percent five years ago. It slipped under 5 percent in the spring of 1997, and for nearly a year it has averaged about 4.3 percent. But inflation in goods other than volatile food and energy not only hasn't gone up, but some analysts are making the case that it's still falling.
Economists have cited a host of reasons inflation has remained so tame, including strong productivity growth, falling prices for imports, declining prices for computers and increasing competition in many markets, particularly those subject to foreign competition.
Nevertheless, this recent history hasn't kept most Federal Reserve policymakers, including Chairman Alan Greenspan, from worrying that if unemployment keeps falling, sooner or later employers will begin to raise wages in an inflationary fashion in order to attract or retain workers. The two falling lines on the chart above illustrate the concern of Greenspan and others.
To the Fed chairman, the issue is not just what is happening to the pool of officially unemployed workers, who must be actively looking for work to be in the labor force and counted as unemployed. Greenspan also is focused on a separate, somewhat smaller group that contains people who don't have a job, aren't actively looking for work--and therefore aren't in the labor force--but say they "want a job now."
The lower line on the chart shows the share of the U.S. population age 16 through 64 that is officially unemployed. This group, whose unemployment rate was 3.3 percent in August, is lower than the official 4.2 percent jobless rate because that rate is calculated as a share of the civilian labor force, rather than the entire population of the 16-to-64 age group.
The upper line shows the share of those aged 16 to 64 officially unemployed, plus those who are in the group saying they want a job now.
At the beginning of 1997, there were 7.03 million in the age group who were officially unemployed and 4.58 million who wanted a job now, or a total of 11.61 million in this pool of potentially available workers. Together, these people made up 6.8 percent of the population of the 16-to-64 age group.
Since then, both groups have shrunk. Last month there were 5.75 million officially unemployed and 4.1 million in the group seeking immediate employment, or a total of 9.85 million people and 5.6 percent of the relevant population.
In congressional testimony this summer, Greenspan reiterated his concern about this declining pool of available workers from the viewpoint of inflation while acknowledging the social value of providing jobs for many workers who normally would not have them.
"Strong demand for labor has continued to reduce the pool of available workers," said Greenspan, who noted that the percentage of the population who are not working but would like a job is close to its lowest point since economists began gathering the data in 1970.
Overall economic growth during the past three years has averaged 4 percent annually, Greenspan said. Of that, roughly 2 percentage points have come from increased productivity and about 1 percentage point from the growth in the working-age population. "The remainder was drawn from the ever-decreasing pool of available job seekers without work, [and] that last development represents an unsustainable trend," he warned.
While Greenspan said tightness in the labor markets "has not, as yet, put the current expansion at risk," he sounded the alarm that further declines in the pool of available workers would force companies to hand out pay increases of about the rate of productivity growth.
In another appearance on Capitol Hill a few weeks later, Greenspan warned that such increases in compensation have historically been a harbinger of inflation.
Worry that the pool of potential workers may shrink further if economic growth doesn't slow is a key reason the Fed raised its target for overnight interest rates by half a percentage point in two steps this summer. Although Fed officials have since indicated they aren't likely to raise rates again next week when they meet, the worry has not gone away.
Some labor experts, including analysts at the Bureau of Labor Statistics, are skeptical about Greenspan's way of measuring the pool of potential workers. They point out that month-to-month changes in the monthly survey of 50,000 American households from which the data are taken occur only at the margins. The vast majority of those who are recorded as officially unemployed one month are still in that category the next month. Of course there is a great deal of continuity, but there is also enormous churning, as people enter and leave the work force, obtain and lose jobs, turn 16, or retire or die.
Taking this churning into account, these labor experts believe there are more potential workers than those in the two groups Greenspan is counting. Others may be enticed into the work force by changing circumstances, including the desirability of a job that might be available, its location, pay and hours.
So far, companies have found enough workers to keep the economy humming. Or they have adjusted their businesses accordingly to survive with the tightest labor markets in a generation. How much longer they can do so will determine just how much Greenspan and his Fed colleagues will have to worry in the future.
CAPTION: THE U.S. POOL
(This graphic was not available)