If the rules of economics operated as advertised, the United States
would be suffering from inflation today.
But, obviously, the laws do not always work. One in particular
- a rule that says inflation goes up when unemployment goes down -
seems to have broken down. And that helps to explain why forecasts
of higher prices have not come true.
The great expectation through the 1980s, enshrined in college
economics textbooks, was this: Inflation would be triggered when
unemployment fell below 6 percent, according to a formula known as
the Phillips Curve. Last August, the 6 percent barrier was finally
breached. But the inflation rate in the first quarter was actually
lower than it was last year.
The breakdown of the Phillips Curve, developed by A.W. Phillips
of the London School of Economics in the 1950s, does not mean the
inflation rate may not soon start to rise from its present, modest
annual pace of 3.9 percent. But if it does, it will be for reasons
that have nothing to do with unemployment, factors such as brisk
consumer spending, the weak dollar and the export boom, hefty
factors all, but none with the inflationary push of higher wages.
Wall Street and Washington now read such seldom-discussed
guidelines as the employment cost index, average hourly earnings,
unit labor costs and union settlements instead of the civilian
unemployment rate for signs of rising wages. And all these Labor
Department statistics show virtually no movement in the past year.
Of course, employment and inflation are not completely
unconnected. No economist would go that far. The unemployment rate
is now 5.6 percent, which it reached in February and March, the
lowest level since 1979; the April figure, to be announced Friday,
is expected to sustain the downward trend. If it doesn't stop
sometime, the pool of unemployed workers will become so small that
executives, in theory at least, will have to bid up wages to win
away workers from other companies. Then, presumably, the executives
will raise prices to cover their higher labor costs.
``But no one knows today what the unemployment level is that
makes inflation happen,'' said Robert M. Solow of the Massachusetts
Institute of Technology, who won last year's Nobel Memorial Prize in
Economic Science. ``We should be cautiously moving the rate down to
see what will happen.''
Such experimentation would show that the trigger point is
between 4 percent and 6 percent unemployment, and probably closer to
6 than to 4, said Professor Lawrence Summers of Harvard.
One beauty of the Phillips Curve was that a so-called trigger
rate of unemployment could be calculated and displayed on a chart.
The point on the chart just above the trigger was called the natural
rate of unemployment: a level that neither pushed up wages and
inflation nor pushed them down. …