Two Percent Unemployment

Real full employment would be better than a hundred government programs for working people. Many of them, and especially white men, are angry because they are falling behind economically and losing status socially. Nothing would rebuild their sense of well-being like the availability of more well-paying jobs.

The question is would lower unemployment mean higher inflation. Thirty years ago economists believed that unemployment below 6 percent would be inflationary and many of them are still stuck in that time warp: When joblessness drops we start to hear the I-word again. In fact in the last years of Bill Clinton's presidency joblessness fell to 3.9 percent and there was no inflation. This was possible for one fundamental reason. The dominant American industries and utilities of the inflationary post-WW II period had all been forced to face new domestic and foreign competitors who took away their ability to raise prices. Important unions in several of these sectors lost wage-setting power as a result.

Price competition by the 1980s had become a reality in autos, steel, trucking, railroads, airlines, telecommunications, much of the financial and energy sectors, and retailing. Healthcare is the exception that proves the rule. It is dominated by local interests that can set prices --- primarily hospitals, doctors' practices, insurers, and local governments --- all of whom are sheltered from the kind of price competition we have in other areas. There are no Wal-Marts cutting prices in healthcare. Hence we have rising prices in this sector and almost nowhere else.

Unemployment has fallen to 5 percent, half of what it was in President Obama's first years in office, but it could go much lower. If policymakers had the brains and guts to fight economic orthodoxy and get the rate down to 2 or 3 percent wages would rise strongly. Employers would be forced to offer more training and benefits and to invest more in technology. Part-timers would find more full time jobs. Labor force participation rates would rise. Productivity would rise too. Anger at the political system would decline because the balance of power in the work place would shift toward employees and working people would sense it. This would make middleclass Americans who now feel powerless more comfortable with capitalism and the direction the country is taking.

More competition in most sectors since the 1970s means that lower unemployment would not lead to inflation. If the country was growing faster and the unemployment rate came down to 2 percent it still would be almost impossible to raise prices without losing market share to competitors. It is a less-inflationary world and the U.S. is not taking advantage of it.