Page 747 - The Principle of Economics

CHAPTER 33 THE SHORT-RUN TRADEOFF BETWEEN INFLATION AND UNEMPLOYMENT 767
financial economist at Keycorp, a Cleve- land bank, “at a time when revenue growth is constrained.”
But with unemployment already at a low 5.5 percent and the economy looking stronger than expected this summer, more analysts are worried that it may be only a matter of time before wage pres- sures begin to build again as they did in the late 1980s. . . .
The labor shortages are wide- spread and include both skilled and unskilled jobs. Among the hardest oc- cupations to fill are computer analyst and programmer, aerospace engineer, construction trades worker, and various types of salespeople. But even fast food establishments in the St. Louis area and elsewhere have resorted to signing bonuses as well as premium pay and more generous benefits to attract applicants. . . .
So far, upward pressure on pay is relatively modest, a phenomenon that economists say is surprising in light of an
uninterrupted business expansion that is now five and a half years old.
“We have less wage pressure than, historically, anyone would have guessed,” said Stuart G. Hoffman, chief economist at PNC Bank in Pittsburgh.
But wages have already crept up a bit and could accelerate even if the economy slackens from its recent rapid growth pace. And if the economy maintains significant momentum, some analysts say, all bets are off. If growth continues another six months at above 2.5 percent or so, Mark Zandi, chief economist for Regional Financial Associ- ates, said, “we’ll be looking at wage infla- tion right square in the eye.” . . . [ Author’s note: In fact, wage inflation did rise. The rate of increase in compensation per hour paid by U.S. businesses rose from 1.8 percent in 1994 to 4.4 percent in 1998. But thanks to a fall in world com- modity prices and a surge in productivity growth, higher wage inflation didn’t trans- late into higher price inflation. A case
study later in this chapter considers these events in more detail.]
One worker who has taken advan- tage of the current environment is Clyde Long, a thirty-year-old who switched jobs to join Trinity Packaging in May. He had been working about two miles away at Ross Industries, which makes food- processing equipment, and quit without having anything else lined up.
In a week, Mr. Long had hired on at Trinity where, as a press operator, he now earns $8.55 an hour—$1.25 more than at his old job—with better benefits and train- ing as well. “It’s a whole lot better here,” he said.
SOURCE: The New York Times, September 5, 1996, p. D1.
growth or decline in nominal national income, the rate of growth of the quantity of money. It cannot use its control over nominal quantities to peg a real quantity—the real rate of interest, the rate of unemployment, the level of real national income, the real quantity of money, the rate of growth of real national income, or the rate of growth of the real quantity of money.
These views have important implications for the Phillips curve. In particular, they imply that monetary policymakers face a long-run Phillips curve that is vertical, as in Figure 33-3. If the Fed increases the money supply slowly, the inflation rate is low, and the economy finds itself at point A. If the Fed increases the money supply quickly, the inflation rate is high, and the economy finds itself at point B. In either case, the unemployment rate tends toward its normal level, called the natural rate of unemployment. The vertical long-run Phillips curve illustrates the conclusion that unemployment does not depend on money growth and inflation in the long run.
The vertical long-run Phillips curve is, in essence, one expression of the classi- cal idea of monetary neutrality. As you may recall, we expressed this idea in Chap- ter 31 with a vertical long-run aggregate-supply curve. Indeed, as Figure 33-4 illustrates, the vertical long-run Phillips curve and the vertical long-run aggregate- supply curve are two sides of the same coin. In panel (a) of this figure, an increase in the money supply shifts the aggregate-demand curve to the right from AD1