As jobless level drops, economists talk of pressure on inflation
ECONOMISTS got a mild surprise Friday when the March civilian unemployment rate in the United States dropped slightly. They had been expecting it to stay flat or even increase a bit. Instead it declined 0.1 point, to a decade-low 5.6 percent. Though the decrease in the number of jobless by 137,000, to 6.8 million, is basically good news, it does put economists mildly on edge. They are wondering whether the economy is getting close to ``full employment,'' or the ``natural unemployment rate.''
Both terms imply a level of activity in the job market where the only unemployed workers are those who are moving from one job to the next. What makes both policymakers and economists apprehensive about full employment is that it gives employees more bargaining power. Both unionized and non-unionized workers can push for higher wages, either by asking their own bosses or by getting new, better-paying jobs with another employer.
Even before full employment is reached, there are shortages of skilled labor. Full employment itself can result in a quick acceleration in the rate of wage increases as companies compete for workers.
``This cycle,'' explains Lacy H. Hunt, an economist with Carroll McEntee & McGinley, ``culminates in a bidding war that drives the costs of production higher, which in turn leads to widespread and persistent inflationary conditions.''
The problem is that economists are not certain at what precise level the economy reaches full employment.
Dr. Hunt hedges, saying ``that condition may be closer than is generally recognized.'' Pat J. Corcoran, an economist with Prudential Economics, puts the natural unemployment rate at 5 to 5.25 percent. Economists at Donaldson, Lufkin & Jenrette, a brokerage house, say it's lower - about 4.5 percent.
Most important, Federal Reserve Board chairman Alan Greenspan told Congress March 15 that ``we clearly have some modest room on the downside, but not a very great deal,'' before the labor market approaches the natural unemployment rate.
Mr. Corcoran reads Mr. Greenspan's comments as implying a rate in the same area as his own calculations indicate - 5 to 5.25 percent. ``We are getting into a part of the business cycle where the Fed needs to be careful,'' Corcoran says. The central bank will probably be more inclined to tighten up at any sign of a speedup in the economic pace.
Fortunately, some ``structural'' factors have apparently lowered the full-employment rate from what it was a few years ago. The baby-boom generation has gained a great deal of work experience. So have women, who have been joining the work force in such large numbers in the past decade and longer. Experienced workers are more able to meet the needs of management.
On the other hand, stricter and more vigorous enforcement of the new immigration law could restrain the supply of labor.
The March employment statistics also reflect a decline in the birthrate in the 1960s and the early '70s. The number of working Americans grew by 3 million over the past year, while the labor force increased by less than 2 million. In March, payroll employment grew 260,000, compared with 531,000 in February - probably a welcome slowdown.
All these factors indicate the Fed has a tricky job ahead in guiding the economy into a modest, sustainable growth rate.