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Old Economy, New Flexibility

Everyone is on the look-out for signs of inflation. One gauge used by economists is capacity utilization. Rising demand causes factories to run more production lines for longer shifts. But bottlenecks and delivery delays can give manufacturers the opening to raise prices. A utilization rate above 83% has typically triggered concerns of budding inflation. But that rule of thumb may not be true anymore.

Technology has lowered the utilization rates at which factories can operate without facing production pressures, according to a discussion paper released by the Federal Reserve. The authors* examined data on 111 manufacturing industries from 1974 through 2000 and controlled for production growth and level of investment for each industry. They found that, as a result of new technologies put in place, capacity utilization rates fell 0.2 to 2.3 percentage points, on average, per industry.

How does technology allow for lower operating rates? According to the authors, declining prices for high-tech gear, such as computer networks, make it more cost-effective to keep excess capacity on hand until needed. In turn, excess capacity has given manufacturing new production flexibility. As a result, the authors say, it is "easier for firms to respond to a period of strong demand by boosting capacity in a timely way."

For inflation-worriers, the results suggest that it may now take a faster pace or a longer period of economic growth to push up operating rates to levels that spark inflation. So recent price spikes may well prove transitory as manufacturers adjust on the fly to gains in demand.

* Cynthia Bansak, San Diego State University; Norman Morin, Federal Reserve Board; Martha Starr, American University, Technology, Capital Spending, and Capacity Utilization, May, 2004

When it comes to health-care benefits, companies and employees just don't see eye to eye. A survey of both employers and workers by the human-resource giant Towers Perrin shows that many employees don't believe what their companies tell them about the growing pressure from soaring benefits costs. Out of 1,000 workers surveyed, half said they believe what their employers say about health costs, and only about a third think rising costs have any impact on the success of the company.

Employers and workers are also at loggerheads over how effectively benefits are used. Of the 120 large and medium-size companies surveyed, nearly two-thirds didn't think their staffs were conscientious health-care users or cared about making lifestyle changes that could lower health-care costs. That's one reason employers are passing along a greater share of the cost to workers. At the same time, 82% of workers believed they effectively use their health benefits.

Towers Perrin says the impasse is largely caused by poor communication. Most workers said their companies neither convey what it actually means to be a better consumer of medical care nor stress the benefits of personal health. Instead, by harping on higher costs, companies are fueling more resentment.

The study shows some opportunities for progress. For example, over three-quarters of workers said they would be willing to make positive lifestyle changes if given a financial incentive to do so. Yet until companies and workers narrow their perceptual differences and work together toward solutions, both workers and businesses will probably keep paying more for medical coverage.

Latinos are the largest minority group in the U.S., at 13.7% of the population in 2003 -- and the Census Bureau projects 20% by 2030. So America's economic success increasingly will rely on how well future generations of U.S.-born Latinos improve their lot. Recent data show cause for concern.

A Federal Reserve Bank of Dallas economist* looked at education levels across generations and found the high-school dropout rate for Latino immigrants was 44.2% in 2001, vs. 7.4% for all non-Latinos. The rate for offspring of Latino immigrants falls to 14.6% but holds at 15.9% for following generations, almost double the non-Latino rate.

Why the gap? Besides lower incomes and a language barrier, "Latinos who contend with the low quality of schooling in many inner cities become discouraged from pursuing a college education and sometimes from even finishing high school," says author Pia Orrenius.

Data show that the education divide accounts for two-thirds of the wage gap between third-generation Mexican-Americans and white U.S. citizens. She says the divergence can be reduced if Latino children get help early. One example: more English language programs that don't pull immigrant kids out of their regular classrooms.

* Pia Orrenius, Immigrant Assimilation: Is the U.S. Still a Melting Pot?; Southwest Economy, May/June, 2004, Federal Reserve Bank of Dallas

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