Wage inflation makes an entrance
FOR some months now, economists have been concerned about unemployment. Not their own, necessarily; rather, they have wondered whether the labor market has become so tight that employers will have to pay more to fill jobs. More pay sounds good - from the employee's point of view. But the larger issues are whether wage increases will induce another round of inflation and, beyond that, whether gains in productivity will keep up with gains in earnings. The surprise, though, has been that wage-rate increases have been far less than expected. It's been a bit like waiting for a certain character to make his entrance in a play. He's listed there in the program, but we haven't seen him yet, and here we are well into the third act....
For most of the current economic expansion, which goes back to late 1982, wage increases decelerated - people got raises, but smaller than before. Just last spring, that turned around. But even so, the United States Labor Department's employment cost index for the third quarter of 1988 showed only a slight acceleration in wage and salary increases over the corresponding period in 1987, 3.7 percent, as against 3.3 percent.
Still, economists such as Lyle Gramley of the Mortgage Bankers Association, for instance, feel that if inflation worsens seriously, it is more likely to be because of employment costs than, say, constraints on production capacity or problems with currency exchange. If the Federal Reserve is successful in bringing economic growth down to its target rate of 2.5 percent annually, the country should get by with inflation of 4.75 percent for this year and 5.25 percent for next, even given the anticipated larger wage hikes.
Certain structural factors are advanced as explanations for these raises: The baby boom has pretty well worked its way through the entry-level employment gates, and women are no longer pouring into the labor force in the dramatic numbers they were a few years ago. Deregulation in the transportation industry and various forms of union concessions have already had their effects.
Still, whatever wage inflation the United States is experiencing is more likely simply the result of cyclical conditions: low unemployment and a continuing strong labor demand.
The most important structural factor, in Mr. Gramley's view, is that inflationary expectations have cooled. As people realize that prices are no longer rising 10 percent or more annually, they accept single-digit wage increases.
Wages, of course, are not the whole of employment costs. The employment cost index showed that benefits rose 6.7 percent through the third quarter of this year, compared with 3.1 percent over the previous year. Health-care costs account for much of this; control them and you control employment-cost inflation, in the view of some observers.
From a broader perspective, though, the important thing is matching wage increases with investment. Investing is, after all, what makes for productivity gains, whether in the form of a junior executive taking a self-improvement course or a widgetmaking plant converting to computer-aided manufacturing. It's not always easy to measure the results of such investments; the widgetmakers will probably be able to make their case with more precision than the junior executive.
But in the long term the only way workers make real gains is through compensation increases supported by productivity gains. Productivity requires investment, and that comes from savings, of which there haven't been enough lately in the United States. And that is many economists' bottom-line concern on employment costs.
