October 12, 1997

CAREERS / By SABRA CHARTRAND

Low Unemployment May Be Hiding Bad News

he economy has been so robust for so long that it's making a lot of people nervous. In their skittishness, a national guessing game has evolved: Will inflation strike? The answer seems to lie in part in what should otherwise be good news -- record low unemployment.

Just over a year ago it seemed that all anyone could talk about was drastic corporate downsizing, the death of the traditional lifetime job, and how college graduates faced a bleak future with no good jobs. Those complaints seemed to evaporate as the current economic boom got under way, to be quickly replaced with widespread marveling over the lowest unemployment figures in a quarter century. Now it seems they may prove to be too much of a good thing.

Short unemployment lines means workers are scarce, especially skilled workers. That in turn forces employers to up the ante when hiring -- offering higher salaries, signing bonuses, fat benefits packages, bounties for referrals.

IN THEORY Traditional theory says that if, over a sustained period, unemployment is low, factories are working around the clock and the economy grows faster than about 2.2 percent a year, eventually inflation will result, growth will be threatened and Federal Reserve officials will be forced to raise interest rates to discourage borrowing and rein in the economy. One way economists estimate the likelihood of inflation is with NAIRU, the Nonaccelerating Inflation Rate of Unemployment. The NAIRU theory says that if the rate of unemployment falls below a certain level and stays under that line, wages and prices will rise. And if the economy continues to grow faster than 2.2 percent, inflation is almost unavoidable. But the unemployment rate traditionally used in this formula has been 6 percent -- and unemployment has been at 4.9 percent for several months.

Traditionally, those increased labor costs eventually turn into higher prices for goods and services. And like a jinx on the economy, increased prices spark inflation. Now business leaders, politicians and even some economists are eagerly arguing that that's the traditional economic cycle. But it won't happen now, they say, because the United States has entered a New Economic Era. Among them, President Clinton and Federal Reserve Chairman Alan Greenspan -- who is more critical to these issues than Mr. Clinton -- have suggested that with technological innovation, the United States has slipped the bonds of traditional economic cycles. Technology has permanently changed the equation -- now the economy can grow by leaps and bounds without risk of inflation. Productivity has increased to unheard-of levels because corporate America has invested in rapidly advancing digital technologies, making businesses so efficient they can absorb cost increases without passing them along in the form of higher prices.

Certainly anyone surveying the last decade has noticed that technology has permeated just about every facet of life. They can be forgiven for feeling reassured that technology has revolutionized the economy, as well. After all, Greenspan has said he believes that the basic economic rules have changed. But he has been careful to theorize that the effect could prove to be temporary. He retains a healthy fear of the traditional economic cycle, too.

"The law of supply and demand has not been repealed," Greenspan warned Congress last Wednesday. "If labor demand continues to outpace sustainable increases in supply, the question is surely when, not whether, labor costs will escalate more rapidly."

There has been no sign of what Greenspan called "wage acceleration," unemployment seems to be holding fairly steady at 4.9 percent, and government reports indicate that job growth in September was lower than expected -- all signs that the economy may be slowing down on its own.

Related Forum Join a Discussion on Whether Inflation is a Threat

But most economists believe the traditional paradigms will raise their ugly heads once again, putting the brakes on the booming economy in the end. Paul Krugman, an MIT economist, wrote last month in the Harvard Business Review that further economic growth depends on increasing the number of workers and their productivity. Both, he argues, are sluggish.

Even without inflation, the healthy job market of 2 million new jobs last year could be camouflaging bad news for working people. Most workers are still waiting for the corporate profits earned from the productivity gains of the last few years to be translated into job security, higher wages, or improved benefits. Instead, inflation-adjusted pay has declined in the last eight years.

Economists have argued that businesses can improve productivity in two ways -- by investing in technology and by investing in worker training. Training makes workers more valuable and more marketable. But the rewards of investing in technology go almost exclusively to the company.

Also, technology and the global economy have forced many companies to find new ways to remain competitive -- and some of those have included eliminating full-time jobs with traditional benefits like health insurance and pensions. Young workers whose parents enjoyed lifetime job security can expect to change jobs every few years. Many will need retraining several times in the course of their working lives to stay abreast of changing technology. Others will have to carve out careers as independent contractors, temporary workers and part-time consultants.

Manufacturing jobs are being lost by the thousands to technology. The Bureau of Labor Statistics says the vast majority of new jobs created between now and 2005 will be in the service sector. There are those who argue that the end of "mass production" really means the end of "mass labor." Many people -- particularly those in the unskilled labor pools -- will find it difficult to make the transition from manufacturing jobs to knowledge-based jobs. Jobs that today require workers with little training, education or skill may soon be carried out by computers, telecommunications systems or robots. At the same time, jobs for computer programmers, software technicians, and engineers go begging for lack of qualified candidates.

Technology has revolutionized productivity in the past, though with mechanisms that are now so familiar they are hardly considered high-tech. But in the 1920s, factory production climbed to new heights when oil and electricity replaced coal and steam power. And in the 1950s, automation dramatically improved the process of producing goods -- and ultimately eliminated a million and a half manufacturing jobs.

---

Related Sites
Following are links to the external Web sites mentioned in this article. These sites are not part of The New York Times on the Web, and The Times has no control over their content or availability. When you have finished visiting any of these sites, you will be able to return to this page by clicking on your Web browser's "Back" button or icon until this page reappears.

• Harvard Business Review: How Fast Can the U.S. Economy Grow?

• Bureau of Labor Statistics

• Federal Reserve