| BUSINESSWEEK ONLINE : DECEMBER 6, 1999 ISSUE | ||||||||
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| COVER STORY
The Labor Pool: Why Greenspan Is Worried What does Alan Greenspan see when he gazes into the labor pool? Something more, it seems, than other economists who seek signs of wage inflation. Before the Federal Reserve decided to raise interest rates for the third time since June on Nov. 16, most measures of unemployment and wages showed a tranquil picture--tight labor markets but scant inflation and robust profits. Still, Greenspan pulled the trigger. Why? For starters, he looks at a broader measure of the job market than the official unemployment rate. His gauge of ''the pool of people seeking jobs,'' calculated by Fed officials using Labor Dept. data, includes unemployed workers aged 16 to 64 who are actively seeking work or say they want a job. In October, this group hit a record low of 9.5 million, or 5.4% of the working age population (see chart). Also catching the Fed chairman's eye: a drop in the number of employees who say they're working part-time because they can't find a full-time job. That figure fell to 3.2 million in October, from 3.3 million in September and 3.4 million in October, 1998, as companies were forced to take on workers full-time to avoid losing them to their competitors. ANOTHER RATE HIKE? Besides being a possible harbinger of wage inflation, the shrinking supply of available workers is also an indicator that the economy is growing faster than it can without eventually sparking inflation, Fed policymakers say. With productivity accelerating, they admit they don't know what the economy's new speed limit should be. But the shrinking labor pool is a sure sign that whatever it is, it's being exceeded. ''If the economy continues to grow over 4% and the labor market continues to tighten, you might see another rate rise in February,'' warns former Fed Vice-Chair Alice Rivlin, now at Brookings Institution. When it comes to inflation, Greenspan knows that the U.S. has been both lucky and virtuous. Lucky, in the sense that falling worldwide commodity prices, a rising dollar, and weak demand overseas have helped contain corporate costs and inflation. Virtuous, in that U.S. companies and workers have become much more efficient as they have harnessed technology. Now, with growth picking up overseas, global commodity prices have begun to rise. Oil prices alone have more than doubled over the past year. And the dollar is no longer strengthening. At the same time, economies in Asia are attracting new foreign capital again, and Europe is starting to pick up some economic steam. The combination has already helped push consumer price inflation up to an annualized rate of 2.8% through October. The annual rate in 1998: 1.6%. The Fed's big fear is that managers are making this inflation rate a benchmark for future compensation. Consumer surveys carried out by the University of Michigan show expectations for inflation over the next year have indeed risen--although the five- to 10-year outlook has not. So far, wage gains have been tame, given the jobs market and higher inflation in the second half of the year. But Greenspan, you can be sure, is keeping his eye on compensation of all kinds. One gauge is the quarterly productivity statistics compiled by the Labor Dept. Unlike the employment cost index and average hourly earnings data, it tries to count the value of exercised stock options and other flexible pay arrangements. According to this measure, which is not adjusted for inflation, compensation rose 4.6% between the third quarter of 1998 and the third quarter this year, vs. a 4.9% hike between the second quarters. To try to divine where wages and inflation are headed, Greenspan also focuses closely on corporate profits. Here too, the news has been good. Corporate profits climbed sharply in the third quarter, indicating that companies are still wringing enough efficiencies out of their operations to offset higher labor costs. Indeed, most of the numbers still seem to say that the Fed can relax. But Greenspan will continue to keep his eye on that labor pool for any sign that the new workforce is producing new inflation. By Rich Miller in Washington _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP |
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 RELATED ITEMS The Wild New Workforce COVER IMAGE: The Wild New Workforce TABLE: Tactics for the Tight Labor Market CHART: The Jobless Rate Has Fallen...But Raises Remain Modest...As Incentive Pay Rises TABLE: Wage Growth Is Slowing for Most Industries The Hidden Costs of Stock Options TABLE: They Do Have a Price CHART: Stock Certificates in Your Pay Envelope The Labor Pool: Why Greenspan Is Worried CHART: The Fed's Favorite Labor Market Statistic INTERACT E-Mail to Business Week Online | |||
