- The Washington Times - Friday, May 12, 2000

Unemployment could keep dropping toward the record low of 3.5 percent set in 1969 as long as today's unique combination of high worker productivity, modest inflation and robust growth continues, many economists say.

But they also question whether the Federal Reserve will allow that to happen as it campaigns against a growing inflation threat with sharply higher interest rates. In any event, economists say it is more likely that economic growth peaked at around 7 percent at the end of last year and unemployment will not fall much below the 30-year low of 3.9 percent set last month.

"I don't see why we couldn't challenge the record," said Robert I. Lerman, labor economist with the Urban Institute. "This isn't exactly unexplored territory. We did achieve those low unemployment rates in the 1950s and 1960s.

"In a lot of states [including Virginia and Maryland], unemployment has been below 3.5 percent for several years now with no disastrous effects," he said, noting that forecasters at the Fed who predicted a sharp increase in inflation were wrong. "That's telling us something about the economy."

Unemployment has fallen without setting off inflation, as it did in past expansions for reasons that are mostly unique to the turn-of-the-century economy, analysts said.

Some of them, such as a dramatic drop in the cost of imports that helped keep prices low during the Asian financial crisis, were only temporary and already have passed one of the reasons the Fed is on the alert, analysts said.

But other improvements such as a surge in worker productivity as highly experienced and skilled baby boom workers enjoy their prime working years may last longer. And some economists argue that another huge wave of productivity since 1995 caused by new technologies from the Internet to cell phones will last well into this century as those and other technologies continue to blossom.

Even given today's seemingly tight labor markets, Mr. Lerman sees room for further growth and employment. He estimates that natural population growth through births and immigration is pushing growth in the number of people available for work up by about 140,000 a month.

If employers dip into the pool of 9.8 million unemployed and discouraged workers documented by the Labor Department, another 150,000 a month could be employed for some time to come, he said more than enough to accommodate an average 200,000 new jobs created by businesses each month.

While companies in certain areas such as the technology havens of Northern Virginia and Silicon Valley in California are reporting labor shortages, Congress is responding with plans to lift the cap on immigration of foreign workers to fill those jobs, Mr. Lerman said.

Outside of those areas, "we have not had the kinds of bottlenecks from the absence of educated and skilled workers" that contributed to the end of previous economic expansions, he said.

Because most Americans have attended college, the work force is more educated than ever and capable of filling the growing number of information technology jobs that are replacing the industrial jobs that predominated in earlier eras, analysts said.

The spectacular gains in technology, in turn, have combined with the aging of the baby boom generation to produce one of the most productive and efficient generations of workers the country has ever seen, they said.

When baby boomers first entered the workplace in force in the 1970s and 1980s, their lack of experience and skills drove up the unemployment rate and held down productivity gains in a major way but that's now history.

Today's productive pool of 140 million civilian workers also has been disciplined by years of corporate downsizings in the early 1990s and competition from inexpensive imports to hold down their demands for higher wages and benefits an important factor keeping inflation low in the 1990s.

Ironically, the economy has been able to grow for a record nine years and unemployment has dropped so low because of the stiff competition and open, global markets that have disciplined both workers and businesses and forced them to keep wages and prices low, analysts said.

To cope with tight labor markets, rather than bid up wages, as they did during previous expansions, businesses pour money into labor-saving technologies such as computerization and attract workers with enticements such as stock options and more flexible hours.

The increased flexibility and perks such as day care in particular have enabled companies to attract the fastest-growing segment of the labor market: working women. While only 40 percent of adult women worked in 1969, today a record 60 percent of women are in the work force.

That has pushed the share of Americans working to a record high of 65 percent, even taking into account a decline in employment among adult men from 80 percent in 1969 to 75 percent today, according to the Labor Department.

While the increase in working women has been the most dramatic change in America's workplace, blacks, Hispanics and other minorities also have gained market share. Last month, the jobless rates for blacks and Hispanics hit record lows of 7.2 percent and 5.4 percent, respectively.

"We've reached out and been able to get people who have always had a hard time in the labor market into work for the first time," said Janet L. Norwood, a former head of the Bureau of Labor Statistics. "That's extremely important for a country like ours and a democracy like ours."

Given the strides made in employment of women and minorities and the ample distance still to go to fully employ those groups Mrs. Norwood is skeptical of talk about labor shortages and worries at the Fed that the pool of workers will soon dry up.

"There are probably some elements of tightness in the labor market here and there," such as specialized workers needed to fix year-2000 computer problems, "but I don't think there are very clear indications of overall shortages," she said.

Many analysts feared that the government would not be able to find the 300,000 temporary workers it needed to conduct the 2000 census this spring, for example. But that didn't turn out to be a problem, she said.

"There are always some people out there who might come into the labor force if things look interesting enough," she said.

Many economists at the Fed and on Wall Street subscribe to the theory that a drop in unemployment below some "natural" rate where the supply and demand for workers is in balance will trigger labor shortages and inflation. A few years ago, they put that "natural" rate at about 5.5 percent.

"Many of us did not accept that," and now history has proved them wrong, said Mrs. Norwood.

Still, whether the economy continues to perform exceptionally will depend on workers and businesses remaining flexible, efficient and cost conscious, she said.

Fed governor Lawrence H. Meyer has been the most vocal proponent of the view that the central bank must sharply raise interest rates to keep unemployment from dropping any further.

"The cumulative decline in the unemployment rate has … pushed the economy … beyond the point of full employment," he said in a speech last month. "The immediate threat of overheating … is, therefore, much greater today."

Mr. Meyer and White House economists argue that the drop in unemployment below its "natural" or "full employment" rate around 5 percent is the result of one-time factors, including the import price drop and a "productivity shock" from computer technology.

Eventually, unemployment will rise back to its natural rate, they say, or wages will rise sharply and most likely set off an inflationary wage-price spiral.

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