Are Raises Bad for America?
The Fed's hawks think so. But pay hikes have yet to spark inflation
Highflying Dell Computer is on a hiring tear, with plans to add as many as 5,000 people to its payroll over the next year. Problem is, the job market in its hometown, Austin, Texas, as in many other parts of the country, is tighter than a pair of bicycle shorts. In particular, demand for such specialists as systems engineers and programmers is white hot, and pay levels are inching up. But Dell wouldn't dream of charging more for its personal computers to offset rising labor costs. "We're not in the business of passing through price increases," says Vice Chairman Kevin Rollins. "We're passing through price decreases." Indeed, the company recently introduced a PC that sells for just $829, its cheapest ever.
Whether companies like Dell can keep hiring without spawning inflation is the economic puzzler that the Federal Reserve Board and Chairman Alan Greenspan are pondering. The Fed raised interest rates by a quarter percentage point earlier this summer and is widely expected to hike them again when it meets this week. The issue now is whether the central bank will continue jacking up rates--and whether it's at all necessary to do so.
Worried hawks. The Fed's leading hawk is Laurence Meyer. He and other inflation-phobes are worried that American workers' recent pay gains will translate into inflation. The most recent worrisome note: Hourly wages rose faster in July than at any time since January.
But changes at the ground level in the American economy suggest that the linkage between increased wages and inflation isn't as ironclad as it once was. Like Dell, companies are going to great lengths to pay certain categories of workers more without passing those costs on to consumers. They are also tapping new pools of labor, both urban and rural. Dell, for example, has opened a factory in job-hungry Tennessee, where it has been flooded with 7,000 résumés for 700 positions. Similarly, telecom giant Sprint has opened a call center in downtown Kansas City, hiring mostly former welfare recipients. It is now rolling that program out in other cities.
To find the right workers at the right price, companies also are relying on new tools such as Internet searches and online job listings at Monster.com and Jobtrak.com. Classified ads in newspapers are increasingly available online, and many companies list job openings on their Web sites so that a restless worker in, say, San Diego can quickly scout out job openings in New Hampshire and apply online.
In short, labor-force management is suddenly one of the most important issues facing corporate America. The reason is simple. Aside from a handful of sectors such as construction materials and medical services, the vast majority of companies don't have pricing power, meaning they can't charge more for the things they sell. "Companies are under very severe competitive pressures, which make it impossible or very difficult to pass on labor cost increases even if they occur," says Richard Rippe, chief economist at Prudential Securities in New York.
Moreover, the "churn" rate in the work force is exceptionally high. Despite a booming economy, outplacement consultant Challenger, Gray & Christmas says American companies will lay off more than 700,000 workers this year, the most this decade. Yet overall unemployment remains at 4.3 percent. The implication is that employers are shedding older, more expensive workers and replacing them with new employees or relying on various forms of contingent labor (story, Page 48). "Downsizing is a valve that releases wage inflation steam," says John Challenger, chief executive of the Chicago-based firm.
advertisement
