THE AMAZING U.S. LABOR POOL
Is its growth holding wages down?
It's a riddle wrapped in a mystery. With U.S. unemployment at a 24-year low, you might think wages would be taking off. Yet labor costs have remained unusually subdued--leading experts to speculate that some new development is inhibiting wage demands. While the explanation du jour seems to be widespread job insecurity, one trend clearly deserves more attention: an unexpected leap in the labor force.
After posting gains of just 1.3 million a year from 1993 to 1995, the labor force--people working or seeking work--has grown by 3.7 million in the past 16 months. That's more than twice as fast as the working-age population.
As economists at Citibank point out, such a surge is unusual so late in the business cycle. Normally, the labor force explodes immediately after a recession, as suddenly improved job prospects induce discouraged workers to look for work again. This time around, it has occurred late in the expansion, after several years of robust growth.
What's more, the pickup isn't confined to areas with tight labor markets. Mark Zandi of Regional Financial Associates notes that New York City's labor force jumped by 3.4% last year--even though unemployment remains above 8%, and the working-age population has been stagnant for years.
In addition, labor-force participation has been rising among nearly all demographic groups. At the end of the 1980s, for example, economists concluded that the portion of women streaming into the work force had leveled off after rising sharply for several decades. Now, women's participation rates have hit new highs. And the rates for both prime-age and older men also seem to be turning up after trending down for decades.
While welfare reform has forced some people to seek work, a study by economist Jill Jacobs of Goldman, Sachs & Co. suggests that it has thus far been a minor factor in the turnaround. Rather, it appears that better job prospects and widespread wage gains are luring many discouraged workers back into the job market. For the first time in the 1990s, reports the Economic Policy Institute, real hourly pay appears to be rising across the wage spectrum.
The surprise is that these pay hikes, which are still quite modest, have sparked such a strong increase in labor supply--an increase that, in turn, has tempered their size. That strong response suggests to economists at both Citibank and Merrill Lynch & Co. that the potential supply of workers is greater than many experts believe.
Thus, the economy may still have some breathing room before wage pressures heat up. Eventually, of course, the slow growth of the working-age population will limit the rise in the labor force. "If we're lucky," says Zandi, "the economy will have slowed to a more sustainable pace before we reach that point."BY GENE KORETZReturn to top
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KEEPING A LID ON OIL PRICES
A warm winter sent costs south
Among several factors likely to restrain inflation in the months ahead, says economist Ram Bhagavatula of Citibank, is the low price of oil. Since early January, he notes, the tab for a barrel has plunged from $26 to $20.
With inventories unusually tight last fall, it looked as if oil prices would climb. But after an initial cold spell, the winter came in on the mild side in Europe and the U.S. And slowing demand for heating oil tempered the usual depletion of inventories, causing prices to slide.
Meanwhile, current projections of global growth in demand are moderate, says Bhagavatula, while supply appears more than adequate. With Iraq now producing oil, many other OPEC nations exceeding their quotas, and non-OPEC output also rising, prices are more likely to feel downward than upward pressure.
The payoff in lower inflation could be considerable. If oil prices stay close to current levels, says economist James E. Glassman of Chase Securities Inc., two-thirds of last year's 9% surge in consumer energy prices would be reversed--chopping half a percentage point off the consumer price index.BY GENE KORETZReturn to top