NCPA - National Center for Policy Analysis

Employment, Wages And Inflation

November 12, 1999

Economists are somewhat awestruck by today's combination of tight labor markets and low inflation rates. For decades many believed low unemployment necessitates wage increases which boost inflation, and they are puzzled by the fact that "wage inflation" hasn't occurred.

How are employers who must scramble to attract workers -- often with signing bonuses and increases in benefits -- managing to hold the line on prices, and still make profits? That question puzzles even the Federal Reserve.

  • In October, the unemployment rate fell to 4.1 percent -- the lowest in almost 30 years.
  • In an effort to avoid price increases without sacrificing profits, employers are turning to new forms of compensation -- such as the rising use of stock options in place of salary increases.
  • Some are offering employees expensive gifts, extra time off and other benefits in an effort to attract new employees and hold on to the ones they have.
  • Improved productivity is another tool, but as one Fed official said recently, "it defies all logic to assume you won't get increases in prices and wages at some point."

Some experts believe that if labor force growth remains at its current annual rate of roughly 1 percent, labor force participation remains steady at around 67 percent and the economy creates an average of around 250,000 nonfarm jobs a month, the unemployment rate will decline to as low as 3.5 percent by the middle of next year.

Source: Richard W. Stevenson, "Hesitating at the Edge of Shallow Labor Pool," New York Times, November 12, 1999.


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