TOO MANY JOBS? SEPTEMBER 6, 1996 TRANSCRIPT

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Unemployment figures are in and at their lowest level in years. But what does this mean for the economy and the average American. To get the answer, Paul Solman talks to a labor economist and a senior economist with a Wall Street investment firm.

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Sept. 6, 1996 Paul Solman talks with the Commissioner of the Board Labor Statistics about jobs in today's economy. August 20, 1996 In its last meeting, the Federal Reserve left short term interest rates. July 5, 1996 Paul Solman leads a discussion on the unemployment rate which has dropped to 5.3 percent. July 3, 1996 Paul Solman examines the role of the Federal Reserve in the nation's economy. May 3, 1996 The NewsHour looks at the correlation between a strong economy and a weak stock market. Browse The NewsHour's coverage of the Economy

PAUL SOLMAN: Now two views on what these numbers mean in terms of our economy, and joining us from New York is John Ryding, the senior economist from Bear Stearns, a Wall Street investment bank, and also there in New York, Audrey Freedman, a labor economist who runs her own consulting firm in New York. Thanks very much to both of you for joining us. First of all, Mr. Ryding, what do today's numbers tell you about the economy?

JOHN RYDING, Wall Street Economist: (New York) Well, I think what it tells me is that the economy's continuing to grow a lot faster than the Fed's forecast of 2 percent. It also tells me--

PAUL SOLMAN: The Fed's forecast of 2 percent. Can you just refresh us on what that is.

JOHN RYDING: Well, the Fed forecast that GDP growth would run around 2 percent in the second half of this year.

PAUL SOLMAN: The economy would be growing at 2 percent?

JOHN RYDING: The economy would be growing at 2 percent in the second half of this year. And they're rather worried that there aren't many resources left to be brought into employment, and so if we continue to see this kind of growth, it's going to worry the Fed about inflation pressures. So I'm looking for the Fed to raise interest rates at the September 24th FOMC meeting now.

PAUL SOLMAN: Well, we'll get to that in a minute, but Audrey Freedman, what do they tell you? Are you similarly worried?

AUDREY FREEDMAN, Labor Economist: (New York) No. I see the economy growing but growing at a moderate pace, and I don't really see any strains on our resources. We're finding people in the work force that are coming into employment. They're being attracted into employment, but at a steady pace. This is--this is no particular blip in this one month. Actually, there are a lot of--some of the factors that Katharine was talking about are at work here, and probably in September, we'll see a moderation there. So we're growing smoothly and steadily, and we don't really see any cause for wage inflation. Actually, it's been two years now that unemployment has been under 6 percent, and previously people were saying this is going to cause accelerating wage inflation, and there's been just minor, minor creep of a few cents per hour in the overall wage picture.

PAUL SOLMAN: Well, Mr. Ryding, explain, would you--refresh our memory as to what the connection is here between age inflation and unemployment and why it is that low unemployment would have you worried about higher inflation.

JOHN RYDING: Well, sure. I mean, the theory is called the Phillips Curve, and it's well received within the Federal Reserve. The view is the lower the unemployment rate, the higher is the inflation rate. In fact, there's a natural rate of unemployment below which if the economy goes we start to see accelerating wages, and, indeed, that rate is probably, according to our research, somewhere around 6 percent. And when we fell below that 6 percent level, which was over a year ago now, we started to see a move up in wage increases.

PAUL SOLMAN: Have we seen inflation? We've been arguing this on this show for years, or this issue on the show for years. And constantly we--people come in and say, well, we haven't seen the inflation yet, but we're about to. You say you've really started to see it at 6 percent?

JOHN RYDING: We are starting to see it in wages, and what we have is average hourly wages which were rising about 2 ½ percent a couple of years ago per year and now rising 3.6 percent over the latest 12 months. And we look over the latest three months, the rate of increase was close to 5 percent. So it would appear that as we have moved below that threshold and continued to move lower that we are seeing a pick up in wage inflation, and the Federal Reserve at its last FOMC meeting for information said that--

PAUL SOLMAN: FOMC is--

JOHN RYDING: The Federal Open Market Committee, the Fed's body that determines interest rate movements.

PAUL SOLMAN: Right.

JOHN RYDING: They said that the outlook for wages and for resource utilization, i.e., the unemployment rate, was critical to the outlook for inflation. And I tend to agree with that.

PAUL SOLMAN: Audrey Freedman, do you see these wages pressures he's talking about? I mean, I've read that--

AUDREY FREEDMAN: No. They're much more moderate than they were historically. Yes, of course, historically we would begin to see inflation accelerating two years ago. When the unemployment went below 6 percent, that was two years ago. But we haven't because the economy is more flexible. We have more contingent employment. We have more flow of employment from job to job. Employers are not copying each other when they set wages now. Yes, if they need truck drivers in the Midwest, of course, wages are going to go up for truck drivers in the Midwest. It will not infect the rest of the company. It will not infect the rest of the industry. In other words, we don't have the imitative pressures that we used to have so that things ripple across the whole economy. It's a much calmer kind of economy but with a much livelier labor market.

PAUL SOLMAN: But is there no rate that the unemployment can't go down to before you start having inflation? I mean, he says--

AUDREY FREEDMAN: I can't imagine, but we're not talking about a 6 percent trigger anymore obviously, obviously if we've been at this for two years, and we don't really see any accelerating wage inflation, it must get--it's got to be lower than this, maybe 5 percent would create some tightening and some extended resource use that would ultimately cost more. It's almost like factory use. You know, as you get the factory use higher and higher, ultimately you start pushing against the resources that are available, and it's going to cost more simply to operate. But it looks as if--and in the labor force we haven't reached that, and we're not going to reach it because I think other things will intervene. We're not going to go below 5 percent, would be my guess.

PAUL SOLMAN: And just briefly, to remind us, what are the reasons you think this is the case, unions are weak, you've talked about some of the issues.

AUDREY FREEDMAN: Unions are weak, employers are no longer imitating each other and accepting a kind of a wage model where they all raise wages across the whole country at the same rate. They only do it in a particular labor market for a particular kind of job when they need a particular kind of worker, but it doesn't infect the rest of the company or the rest of the industry.

PAUL SOLMAN: Mr. Ryding, isn't that true? I mean, hasn't the world changed significantly, global competition, technology, and so forth, and so we haven't seen accelerating inflation, and we've had people like you on the show for years now saying it was going to start accelerating at 6 percent, at 5.8, 5.5, we're now down to 5.1. Don't you feel a little like you might be the guy crying wolf here?

JOHN RYDING: Not in the slightest. In fact, the research piece which I published recently, the Phillips Curve, alive and well, shows there's been no change in behavior of wage setting, given the unemployment rate. We have had a steady but slow acceleration in wages. Factually, it was the case that two years ago the 12 month change in average hourly earnings was around 2 ½ percent. Now it's around 3 ½ percent. And that's a percentage point acceleration. And while that might sound like a very small figure, you've got to understand that we've been living in a period where the inflation rate has been between 2 ½ and 3 percent as measured by consumer prices. And if we move above that range and sustain 3 ½ percent or even accelerate further, which we have done over the latest three months, that will eventually either cause one of two things, higher inflation or a Federal Reserve response or both.

PAUL SOLMAN: And you think the Federal Reserve at its next meeting in a few weeks will respond by raising interest rates to slow down the economy, is that what you're saying?

JOHN RYDING: I think it's very likely the Fed will take that action because look at the figures as--as the labor commissioner said, the economy can only absorb right now--we only produce 130,000 new people entering the labor force each month, and our job creation rate, whether we look at the household survey, or we look at the establishment survey, the two job surveys in this report are running somewhere around two hundred to two hundred and fifty thousand a month, depending on where you stick the pin in the donkey and decide which factors you're going to drop out, but that is the trend that we're running at. So the Fed feels it needs to slow the economy down, otherwise, that unemployment rate is going to move lower, and eventually we'll find what rate it is that causes serious acceleration in both wages and prices.

PAUL SOLMAN: Now, Ms. Freedman, we're used to hearing in recent years that when there's good economic news like this morning's, then the stock market gets scared because it thinks the Fed is going to raise rates, and then it goes down. Today the stock market was up almost 53, so why--is it not believing what he's saying, is--

AUDREY FREEDMAN: Well, I'm an economist, not a psychologist.

PAUL SOLMAN: Well, but we're both here on the show.

AUDREY FREEDMAN: Well, what people are doing, they're looking at it to see what the Federal Reserve is going to do, and they're looking to see what the stock market, itself, is going to do, and so they're not reacting really to fundamental moves in the economy. They're reacting to reactions of reactions, and it's--a lot of it is shadows. I also think that the market is very volatile, it goes up and down, and for the first two hours after the numbers are out, the market goes up and down, bond market rises and falls and rises and falls. A lot of money is made when there's a churning like that by the stock brokers and bond brokers. I sometimes wonder whether they're very happy when there's a good deal of churning and a lot of volatility because they're making money all the way buying and selling.

PAUL SOLMAN: The commissions that they make. And Mr. Ryding, very briefly, do you agree that the stock market acted just psychologically or anomalously, or what?

JOHN RYDING: Not at all. I actually think we've reached a level on long-term interest rates where two or three Federal Reserve increases are priced in so the market anticipated bad news this time, and when it got the news of the wage pressures and the drop in the unemployment rate, yields didn't move higher. In fact, the market said, hey, you know, I'm comfortable with the idea the Fed's going to be raising interest rates, and this doesn't mean horrible things for interest rates down the road, and so stock prices rally. And by the way, on that volatility, a lot of money can be lost as well as winners--not that easy to, uh, trade for profit.

PAUL SOLMAN: Well, enough about that. We'll deal with that some other time, but thank you both very much for joining us.

JOHN RYDING: Thank you.

AUDREY FREEDMAN: Thank you.

MR. LEHRER: Still to come on the NewsHour tonight, the Bosnia elections, political consultants, and Shields & Gigot.

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