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Have We Reached Full Employment? Should The Fed Put the Brakes on Job Growth to Avoid Inflation Down the Road?

By       Message Frank Stricker       (Page 1 of 1 pages)     Permalink    (# of views)   7 comments

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The answers are no and no. Even when the official unemployment rate is 4.1%, we are not close to real full employment. And inflation is mild. If the authorities are really worried about higher inflation later on, they should start working on counter-measures that don't include higher unemployment.

How these issues were worked on over the last fifty years is instructive. In 1969, after a 1964 tax cut and hefty spending increases on the Vietnam war and social programs, prices were rising 5.5% a year. The upside was that the official rate of unemployment was down to 3.5% and more jobs and rising wages was lifting millions of people out of poverty. But there were still millions more who were unemployed or underemployed. Some of these people rioted in America's cities. A special Department of Labor survey of ten inner-city communities revealed levels of unemployment that were much higher than what the government found in its regular survey.

But in the late 60s and the 1970s, anti-inflation concerns often replaced anti-poverty and employment concerns. Reducing demand for goods and workers was used to limit wage and price increases. A short recession in 1969-1971 raised unemployment. But it did not moderate inflation much. Then world demand pushed food prices up and soon, oil prices surged. The latter were a major cause of inflation in the 70s, but many authorities, especially conservatives, shifted the focus of blame to wages rather than oil prices.

In 1971-1974 President Richard Nixon tried government wage-and-price controls--an interesting idea that worked pretty well in World War II--but unionists felt that wages were more tightly controlled than prices; and business leaders did not like price controls. So a possibly useful method for maintaining job growth while restraining prices was dismissed. Then the administration and the Federal Reserve engineered a deep recession--the worst since the 30s. But textbook results did not follow. A new phenomenon was born: stagflation. Unemployment, which reached 8.5%, was supposed to limit wage and price increases, but it hardly made a dent. You'd have thought that this challenge to economic assumptions would force experts to rethink the basics. If a recession with 8.5% unemployment did not have much effect on prices, perhaps the high-unemployment approach was wrong. But many experts doubled down on the old-time religion: if high unemployment did not tame inflation, then the economy needed more of it all the time. Not to worry. In the late 70s, former Nixon advisor, conservative economist Herbert Stein, declared in the Wall Street Journal that we should simply consider that 7% unemployment was full employment. Guilt-problem solved,

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In the early 80s, Federal Reserve Chair Paul Volcker and President Ronald Reagan gave America a shocking recession with very high unemployment. The White House also joined the war on unions and working-class living standards. This recession and luck on oil prices got inflation rates way down. Soon, job totals grew strongly, but many jobs were lousy ones.

Economists, meanwhile, refined anti-worker inflation cures. A source here was conservative economist Milton Friedman's 1960s idea of a Natural Rate of Unemployment, below which unemployment must never be allowed to go. This Natural Rate idea was supported by contrived ideas of how workers reasoned about jobs and inflation. In the 70s, Friedman's idea began to morph into NAIRU, the Non-Accelerating Inflation Rate of Unemployment. The causative links between unemployment, wages, and prices were not always clear. But NAIRU seemed to offer a quasi-scientific way to determine how far down unemployment could go before wage-and-price inflation accelerated. While something like NAIRU seemed to work in the Reagan-Volcker recession, it did not have reliable predictive power. It supplied scholarly sounding gobbledygook to justify the idea that workers had to bear the cost of inflation-fighting in the form of lost jobs and wrecked communities.

As the number of cheap imports ballooned and the number of union members sagged, the official unemployment number could get pretty low (4% in 2000) without much increase in prices. That's not what NAIRU predicted, but it lived on. Worse, it was equated with full employment. Many economists thus defined full employment by reasoning backward from the level of unemployment they guessed was needed to keep the lid on wages, not forward by what was necessary to employ everyone who wanted a job. Some economists grew skeptical of NAIRU, but in 2017-2018, the staffs at the Federal Reserve and the Congressional Budget Office seem to believe this: 4.7% unemployment = full employment = NAIRU. But the official unemployment rate is 4.1%--lower than NAIRU--and wages and prices are not taking off.

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There are several reasons why 4.1% unemployment does not send wages and prices soaring. These reasons include falling union density and a flood of cheap foreign goods. But another reason is that real unemployment is much higher than 4.1%. There are millions of potential workers and quiet job-wanters who are ready to work but are not labled unemployed. We have a labor surplus, not a labor shortage. It's true that in some locales, there aren't enough truckers available at customary wage levels, so owners have to pay more. That's good, but let's not get too excited: $19.50 an hour and no company-supported health insurance is not exactly the lap of luxury, especially if you are making sizeable payments on your truck.

We need to reframe the conventional view of current labor markets. There is no general shortage of workers today. Labor markets are just approaching where they should be. A huge fraction of workers are still paid rotten wages. It's not a labor shortage when tens of millions of workers earn less and often much less than $20 an hour. There are millions of potential employees outside the labor force and ready to work. There are five million people every month who say they want a job although they are not currently looking for one. These people offer a variety of explanations for why they are not looking, including illness, family responsibilities, and the belief that they will not find a job; but some of them eventually go to work.

Some of these 5 million are among the 7 million prime-age (25-54) males who are not working or even looking for work. Some of these men live in depressed areas in Chicago, Detroit, Cleveland, Paterson and Ocean City, New Jersey, rural areas of Alabama and Mississippi, West Virginia, East St. Louis, El Centro, California, and dozens of other left-behind communities. Some are disabled and some are drug addicts. But the number of disabled people in the labor force is rising and so is the number of prime-age men. There is, also, more demand for ex-prisoners--people who normally face huge barriers to getting hired. It is noteworthy too that the rate of employment for people without high-school diplomas is rising and that the percentage of people 55 and over who are in the labor force, which was 30% in 1993, is now 40%. These facts suggest that there is a large pool of workers many of whom are not called unemployed but who are virtually unemployed and ready to work.

Looking at the big picture, we can emphasize the labor shortage: it's a boohoo situation for employers who have to accept types of workers they used to reject. How tragic for them. Or we can say that labor markets are just beginning to function as they should. And good times for workers have barely begun. Over the last year, after-inflation wages for average employees and for new hires have not increased. That's in the midst of the boomingest labor market in ten years.

We should push for fuller employment--let's start by aiming for 3.0% in the official count. We've not had 3.0% since World War II. Before we get there, will inflation fears cause the Fed to put the brakes on job growth? What should people do about inflation? If inflation rates are only modestly higher, and less than wage increases, people should pressure the authorities to leave things alone. If wages are increasing at 4 to 5% and prices at 2 to 3%, and consistently so, that's a good deal for workers in the lower half. But what if prices surge? I don't have the answer but there are a variety of options. I wish some of the geniuses who run the government and the economy would get their experts working on anti-inflation policies that don't push millions of people down into unemployment and poverty. If politicians really love workers--many say they do--why have they gifted corporations and rich people with trillions of dollars in 2001, 2003, and 2017--no obligation to create jobs or raise wages--but not approved a new WPA to provide good jobs for millions who still need them, or authorized a measly hundred million dollars for Institutes to Study Solutions to High Inflation That Don't Require More Unemployment and Low Pay? And why is the Fed thinking about NAIRU-like actions, raising interest rates to slow job growth, when there is still a lot of unemployment to solve?

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Frank Stricker is on the board of the National Jobs for All Coalition. He taught history and labor studies at CSUDH for thirty-five years. He has just written What Ails the American Worker? Unemployment and Rotten Jobs: History, Explanations, Remedies. For sources of this essay, e-mail frnkstricker@aol.com.

 

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ProfessorEmeritus of History, Labor and Interdisciplinary Studies, California State University, Dominguez Hills.
Author of Why America Lost the War on Poverty--and How to win it (Univ. of North Carolina Press, 2007)

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