Page 746 - The Principle of Economics

766 PART TWELVE SHORT-RUN ECONOMIC FLUCTUATIONS
IN THE NEWS
The Effects of Low Unemployment
ACCORDING TO THE PHILLIPS CURVE, WHEN unemployment falls to low levels, wages and prices start to rise more quickly. The following article illustrates this link between labor-market condi- tions and inflation.
Tighter Labor Market Widens Inflation Fears
BY ROBERT D. HERSHEY, JR. REMINGTON, VA.—Trinity Packaging’s plant here recently hired a young man for a hot, entry-level job feeding plastic scrap onto
a conveyor belt. The pay was OK for un- skilled labor—a good $3 or so above the federal minimum of $4.25 an hour—but the new worker lasted only one shift.
“He worked Friday night and then just told the supervisor that this work’s too hard—and we haven’t seen him since,” said Pat Roe, a personnel director for the Trinity Packaging Corporation, a producer of plastic bags for supermarkets and other users. “Three years ago he’d have probably stuck it out.”
This is just one of the many ex- amples of how a growing number of com- panies these days are facing something they have not seen for many years: a tight labor market in which many workers can be much more choosy about their job. Breaking a sweat can be reason enough to quit in search of better opportunities.
“This summer’s been extremely difficult, with unemployment so low,” said Eleanor J. Brown, proprietor of a small temporary-help agency in nearby Culpeper, which supplies workers to
Trinity Packaging. “It’s hard to find, espe- cially, industrial workers and laborers.”
From iron mines near Lake Superior to retailers close to Puget Sound to con- struction contractors around Atlanta, a wide range of employers in many parts of the country are grappling with an inability to fill their ranks with qualified workers. These areas of virtually full employment hold important implications for household incomes, financial markets, and political campaigns as well as business profitabil- ity itself.
So far, the tightening labor market has generated only scattered—and in most cases modest—pay increases. Most companies, unable to pass on higher costs by raising prices because of intense competition from foreign and domestic rivals, are working even harder to keep a lid on labor costs, in part by adopting novel ways of coupling pay to profits.
“The overriding need is for expense control,” said Kenneth T. Mayland, chief
published a paper denying the existence of a long-run tradeoff between inflation and unemployment.
Friedman and Phelps based their conclusions on classical principles of macro- economics, which we discussed in Chapters 24 through 30. Recall that classical theory points to growth in the money supply as the primary determinant of infla- tion. But classical theory also states that monetary growth does not have real ef- fects—it merely alters all prices and nominal incomes proportionately. In particular, monetary growth does not influence those factors that determine the economy’s unemployment rate, such as the market power of unions, the role of ef- ficiency wages, or the process of job search. Friedman and Phelps concluded that there is no reason to think the rate of inflation would, in the long run, be related to the rate of unemployment.
Here, in his own words, is Friedman’s view about what the Fed can hope to accomplish in the long run:
The monetary authority controls nominal quantities—directly, the quantity of its own liabilities [currency plus bank reserves]. In principle, it can use this control to peg a nominal quantity—an exchange rate, the price level, the nominal level of national income, the quantity of money by one definition or another—or to peg the change in a nominal quantity—the rate of inflation or deflation, the rate of