Are Raises Bad for America?
The Fed's hawks think so. But pay hikes have yet to spark inflation
Train, not raid. With 1,700 employees in Omaha, where unemployment is below 3 percent, Inacom is frustrated by how long it takes to find skilled workers to manage help desks, for example. Compensation for such employees has increased by about 5 percent recently. Fairfield says Inacom could raid other companies for talent, but that ratchets up every company's compensation tab. Hence the willingness to pool resources to create a bigger stream of employable young people. "There's no question it's a structural change" in the relationship between employers and schools, adds Fairfield.
Are all these microeconomic tools enough to hold off inflation? Challenger thinks they may be. He argues that the economy is "self-correcting" because employers will do whatever it takes to avoid passing increased labor costs through to the marketplace. But Diane Swonk, chief economist of Bank One, also in Chicago, thinks it's inevitable that tight labor conditions will spark inflation.
Swonk notes that smaller companies, particularly in the service sector, don't command all the tools that bigger companies have to hold wage costs down. "We have seen a turning point," she says. "It will be so gradual that it's hard to notice, but that doesn't mean it hasn't occurred." Other like-minded economists are calling for the Federal Reserve to increase interest rates by a full percentage point by the middle of next year.
For now, at least, the absence of clear inflationary signals in the consumer and producer price indexes strengthens the hand of experts who argue that something has changed in the economy, loosening the automatic linkage between full employment and inflation. They don't argue that inflation will never occur, just that current gains in employment and income aren't yet a threat. If they're right, the U.S. economy could keep on expanding, making it to the nine-year mark in February. But as everybody knows, Greenspan could cork the bottle at any moment and ruin the party.
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