HOW TIGHT ARE LABOR MARKETS?
Maybe even tighter than they look
By most estimates, the current jobless rate of 5.4% is below the so-called natural rate of unemployment--the rate at which labor markets are so tight that further declines are likely to spark inflation. But a number of economists argue that the labor market is looser than the jobless rate suggests.
Many note, for example, that the average jobless spell, which usually declines in tandem with unemployment, has stayed unusually high during the current expansion (chart). In fact, it is now about 30% higher than it was when unemployment hit 5.4% in the late 1980s--a development that seems to imply the existence of a large pool of unemployed workers who should be eager to find work even at reduced wages.
Economist Daniel Sullivan of the Federal Reserve Bank of Chicago isn't so sure. In a recent commentary, he points out that the average spell of unemployment has been raised by a relatively small--though significant and rising--number of long-term unemployed. Most jobless spells in the U.S. remain quite short, and the number of newly unemployed as a fraction of the labor force is now actually close to its post-1960s low.
At the same time, the number of long-term unemployed in the 1990s appears to have been boosted by an unusually high fraction of permanent layoffs resulting from business downsizing. Many laid-off workers who are older or have specialized skills tend to engage in long job searches. And rising unemployment among low-skilled workers in recent decades has also been accompanied by lengthening jobless spells.
Further, says Sullivan, skills erode as time passes--lessening job-seekers' employability. And though those without work for some time may be more willing to accept lower wages, longer jobless spells may reflect a lack of qualifications for jobs with changing skill requirements.
Sullivan's analysis of recent inflation and unemployment trends, in fact, indicates that longer average spells of unemployment (holding the jobless rate constant) now tend to raise inflationary pressures. "In today's economy," he says, "high durations may well signal greater labor market tightness."By Gene KoretzReturn to top
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BLAME IT ON THE SUN
Are sunspots linked to inflation?
Grain prices are soaring, America's winter wheat crop has been devastated by drought and frost, and cattle ranchers have begun to liquidate their herds. To economist Sam Nakagama of Nakagama & Wallace Inc., it all has a familiar ring. Some 20 years ago, he warned that a similar confluence of events could seriously boost inflation. Then, as now, he laid the blame on the influence of a celestial body: the sun.
According to some theorists, solar activity in the form of sunspots is characterized by a 20- to 22-year "double cycle," whose low phases are often associated with unusually dry weather and cold winters. The last low phase was in the mid-1970s when the oil crisis and extended droughts pushed inflation into double digits. The most memorable episode was the Dust Bowl of the 1930s.
Nakagama claims the sunspot cycle is behind the unusual weather patterns that have been roiling agricultural--and oil--markets since last summer. If he's right, future inflation readings could be higher and more variable than the financial markets are expecting.By Gene KoretzReturn to top