National worker well may well be running dry

WASHINGTON -- Here's a worrisome thought for Federal Reserve officials concerned that tight labor markets mean higher inflation ahead: The U.S. unemployment rate, now at a 23-year low, may fall to as low as 4 percent in the months ahead.

"We're literally running out of people to employ," said Diane Swonk, deputy chief economist at First Chicago, NBD.

The continued strong economy has added about 850,000 jobs in the first four months of 1997, pushing the jobless rate down to 4.9 percent from 5.4 percent in January. So far, employers have been able to find workers to fill most of these new jobs. Labor force growth is slowing, however. "Arguing for a lower unemployment rate is demographics," Swonk said. "The baby boomers are employed, and the baby busters -- there's not that many of them." That's a concern to Fed policymakers charged with keeping prices in line. At some point, employers will have to pay more to attract increasingly scarce workers. Last month the economy created 142,000 new jobs. The overall labor force, however, dropped by 221,000. Over the past three months, the labor force has grown at less than half the rate of job creation. Further slowing in labor force growth will cause the unemployment rate to fall and put more pressure on wages. "It's this rise in labor costs that risks ending the period of benign inflation," said Charles Lieberman, chief economist at Chase Securities Inc. in New York. Underlying demographic trends show the U.S. labor force should grow at a 1 percent annual rate, Lieberman said. That implies another 1.4 million workers a year, or 117,000 per month. For the past half year, an average of 244,000 workers have been entering the labor force each month. "If that had not occurred, the unemployment rate could be significantly lower" already, Lieberman said. If the labor force had grown last year at a pace "closer to the demographic trend, unemployment would have been about a percentage point lower," he said. "It could be around 4 percent." Several factors have enabled the labor supply to keep up with the growth in jobs. The percentage of working-age people who have jobs is at a near-record level of 67.2 percent. The good news about job creation has drawn the attention of those who had given up looking. The number of so-called discouraged workers fell by more than half a million over the past year. Overhauling the welfare system has also boosted the labor force. And though it's harder to quantify, young men and women have been joining the ranks of the employed at an ever-increasing pace. Also, immigration has played a big role in adding to the labor rolls. Hispanics, in particular, have been joining the ranks of the employed in recent months. Their participation rate at 67.3 percent is higher than that for the general population. Economist Bruce Steinberg of Merrill Lynch Inc. in New York isn't particularly worried that the labor force will stop growing. "The participation rate for adult men remains well below the 1980s norm and can easily rise further," he said, adding that "welfare reform hasn't even begun to bite." Conditions adding to the labor force "might keep (the unemployment rate) elevated a little longer," said Lieberman. Yet the "safety valves" may be closing, he said, and "probably sooner rather than later, the surge in the labor force will slow down." For one thing, companies are drawing workers from limited pools. The number of legal immigrants to the U.S. is capped by law. While illegal immigrants are counted when the Census Bureau does the unemployment survey each month, they tend by their nature to be at the low end of the income scale. The same is true of welfare recipients. Even though the full effect of welfare reform lies ahead, few moving from welfare to work are expected to get high paying jobs. So even if they add to the labor force, neither category represents much of an inflation threat. One group of persistently "discouraged" workers does represent a potential problem, however. White males over 50, the middle- management victims of corporate layoffs, are now finding jobs. "Labor market conditions are tightening up enough the companies are beginning to look at hiring them again," Swonk said. "That's a major issue for the Fed, because they represent a large supply of fairly high-skilled workers." While Fed Chairman Alan Greenspan has repeatedly said there's no way to know at what level unemployment becomes an inflation problem, the lower it falls, the more likely it is that workers will be able to bid up wages to a point that companies have to pass along the cost as higher prices. Lieberman already sees it. Average weekly hours worked has been increasing at about a 4 percent annual pace. Overtime hours worked are at record levels as employers ask current workers to fill the gap. The Fed itself, in its regional survey of economic conditions known as the beige book, reported "tight labor markets and shortages of qualified help persisted throughout much of the nation in March and April report." Although wage pressures were reported generally subdued, "the notable exceptions are those areas and occupations where serious shortages existed."

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