NCPA - National Center for Policy Analysis

Federal Reserve Report: For Low Unemployment, Low Inflation (SUMMARY)

June 4, 1998

A new report from the Federal Reserve Bank of Dallas suggests major changes in U.S. labor markets explains why low unemployment hasn't kindled inflation. Economist John V. Duca contends three factors have created a "new labor paradigm."

They are: cheaper imports from overseas, intense competition among firms that aren't directly affected by imports and major technological advances that have boosted productivity and allowed businesses to expand output while cutting costs.

  • Duca argues these fundamental changes have led to an American workforce that is more "market responsive."
  • The growing use of temporary and part-time workers has allowed firms to lower production costs and respond immediately to changing marketplace conditions.
  • The decline in the power of unions has led to a decline in the use of long-term wage contracts with big, automatic pay raises for workers.
  • Workers' profit-sharing plans have altered the wage-inflation landscape, Duca explains.

These advances would not have been possible without the relative flexibility the U.S. labor market enjoys. By contrast, rigid work rules and labor laws have denied such adjustments to many European labor markets -- dooming them to high unemployment and lower productivity.

Source: John V. Duca, "The New Labor Paradigm," Southwest Economy, May-June 1998, Federal Reserve Bank of Dallas, P.O. Box 655906, Dallas, Texas 75265, (214) 922-5257; Perspective: "A New Paradigm for Labor?" Investor's Business Daily, June 4, 1998.


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