UNEMPLOYMENT RATE DECLINES TO 7-YEAR LOW : HOURLY EARNINGS CONTINUE GAINS.

Byline: Robert D. Hershey Jr. The New York Times

The nation's unemployment rate fell to a seven-year low of 5.1 percent in August, and hourly earnings posted their second healthy increase in three months, the Labor Department reported Friday.

The upbeat data, which offered the first broad view of the nation's economic performance last month, did not immediately faze stock and bond markets that have become increasingly nervous about the pace of growth.

Indeed, prices rallied even though many analysts were now even more convinced that the Federal Reserve might have to raise interest rates soon to slow the economy and keep inflation under control. Rates eased across the board while the Dow Jones industrial average rose nearly 53 points.

The Labor Department report showed that the economy continued to plow ahead at a steady pace and had pushed joblessness down to a level not seen on a regular basis since the early 1970s.

Employers added 250,000 workers to their payrolls in August, on top of a 228,000 gain in July. And average earnings, which have been stagnant or falling for most of the 1990s, finally have begun to outpace the rise in prices.

The increase in average hourly earnings was 6 cents an hour, to $11.87, a hefty increase but magnified, analysts said, by the return of high-paid auto workers after vacation shutdowns. This followed a 2-cent decline in July and a 10-cent surge in June.

``It's pretty clear that wage inflation is rising,'' said James O'Sullivan, an economist at Morgan Guaranty Trust. He considered it ``extremely likely'' that the Federal Reserve would decide to raise short-term rates later this month.

Wall Street tends to be of two minds about tighter monetary policy, disliking the higher interest rates it immediately brings but comforted by a central bank seen as intent on staying ahead of the inflation curve.

Friday's report, seemingly tailor-made for political exploitation by the Clinton administration, featured a three-tenths of a point decline in the unemployment rate, to 5.1 percent, the lowest since March 1989. And 467,000 people left the jobless ranks, pushing the total below 7 million for the first time since July 1990.

The strength of the statistics, however, was magnified by some statistical quirks, particularly involving the heavy seasonal churning related to summer jobs.

The government's survey, based always on the week that includes the 12th of the month, captured more of August than usual this year, and therefore counted a very high number of students leaving jobs, the labor force or both. As a result, jobs, as gauged by the survey of households, grew by a moderate 171,000 while the labor force contracted by 296,000.

But Katharine Abraham, the commissioner of labor statistics, also cited a sharp decline in adult joblessness to argue that a significant portion of the overall drop pointed to a broad improvement unrelated to the timing of the survey.

The rate for adult men tumbled five-tenths of a point, to 4.2 percent, while the rate for adult women fell three-tenths, to 4.6 percent.

The teen-age rate, meanwhile, rose eight-tenths of a point for all teen-agers and 4.5 points for African-American teen-agers.

All four regions enjoyed lower jobless rates last month. Unemployment in the Northeast improved the most - to 5.1 percent from 5.6 percent - to make the region's rate as good as the national average for the first time since January.

The Midwest's jobless rate eased four-tenths of a point, to 4.4 percent; the South's three-tenths of a point, to 4.9 percent, and the West's two-tenths of a point, to 6.3 percent.

The jobless rate for African-Americans stayed steady at 10.5 percent, while the rate for Latinos dipped to 8.7 percent from 9 percent in July. The rate for whites was 4.4 percent, down from 4.7 percent.

The department's survey of employer payrolls, normally the main focus of economists and traders, was also muddied this time by other factors that exaggerated job growth. Nearly one-third of the 250,000 increase in payroll employment was accounted for by teachers and other local government workers.

Abraham called the agency's seasonal adjustment process ``problematic'' at this time of year because its estimates are highly sensitive to the timing of school openings and changing educational schedules in general.

``Many of these `jobs,' '' Bruce Steinberg of Merrill Lynch advised clients, ``will evaporate over the next two months because the seasonal factors will be looking for teachers who are already at work.''

For the private sector alone, the 173,000 August gain fell short of the 215,000 average posted in the first seven months of the year as factory jobs recovered only their auto-related July loss and growth in services was a bit less than normal for the second consecutive month.

Health services, a powerhouse through May, added a paltry 9,000 jobs last month, and retail trade added 21,000 after several months of bigger gains. Finance, insurance and real estate added 20,000 jobs for the second consecutive month.

Richard Berner, senior economist at the Mellon Bank, predicted that the Federal Reserve, growing increasingly concerned by what he called a ``gentle uptrend'' in wages, ``is likely to take its first step toward a tighter monetary policy'' within the next few weeks.

CAPTION(S):

2 Charts

Chart: (1-2) The Labor Picture in August

(1) Unemploymen t

(2) Employment