Too many jobs?

Too Many Jobs?

THE U.S. economy added nearly a million jobs from January to March, leaving egg on the faces of many economists who had confidently predicted an imminent recession. So the definition of the latest "economic crisis" promptly reversed direction once again. The new problem was said to be that unemployment was too low, which supposedly threatens a burst of inflation. So, while Congress prepares trade legislation to "save jobs," we simultaneously face the opposite complaint: that jobs are already too plentiful. It does not matter at all what the critique of Reaganomics is, so long as it remains critical.

The "cost of full employment," wrote USA Today (April 1), is that "when unemployment goes down, prices go up." Unfortunately, the chart accompanying that article showed the exact opposite--inflation and unemployment in the U.S. rose together in the late 1970s, and have fallen together over the past five years. Comparisons across countries are equally at odds with the notion that low unemployment is inherently inflationary. Wages and prices are rising most rapidly in places like Italy and Spain, with unemployment of 15 to 20 per cent, and least rapidly in Switzerland, Hong Kong, and Japan, where unemployment is 1 to 3 per cent.

The whole idea that inflation is caused by too many people working, rather than by easy money, goes back to the late 1960s. For perspective, the unemployment rate among adult males as early as 1966 was half what it is today, and manufacturing was then running above 91 per cent of capacity, compared with 82 per cent today. Yet what really happened in the 1960s was that monetary policy attempted to drive unemployment still lower (to 3.4 per cent in 1969) by inflationary means. The Federal Reserve doubled its stock of government securities from 1961 to 1969, paying for them with new money in a vain effort to keep interest rates artificially low.

Inflation may reduce unemployment for a while if prices rise faster than wages, making labor cheap. But unemployment can also fall for real reasons as well, such as the fact that the minimum wage has not been raised for years, and that lower tax rates now make jobs more attractive at the same pre-tax wage. These supply-side remedies to unemployment are obviously not inflationary. But all of the Democrats' favorite alternatives--more tariffs, taxes, and dollar debasement --promise both higher unemployment and higher living costs.