NCPA - National Center for Policy Analysis

Low Unemployment And Low Inflation Can Co-Exist

December 14, 1999

A recent Labor Department study shows states with low unemployment have been experiencing no more wage-inflation pressure so far than those with high unemployment. One possible implication of the findings is that the national unemployment rate, already at a 29-year low of 4.1 percent, could drop even more without sparking an inflationary spiral.

Until just a few years ago, economists assumed there was a national level, between 5.5 percent and 6 percent, below which unemployment couldn't sink without sparking wage and price increases. Now, that no longer appears to be the case:

  • As of October, 32 states had unemployment levels below 4 percent.
  • Iowa's unemployment rate was 1.8 percent.
  • Even the state with the highest unemployment rate, West Virginia, stood at only 5.9 percent.

While some still believe the optimum national level is between 5 percent and 5.5 percent, economist Robert I. Lerman, who conducted the study, believes it could safely drop as low as 3.5 percent.

Source: John D. McKinnon, "Even-Lower Jobless Rate May Not Ignite Inflation," Wall Street Journal, December 14, 1999.


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