Jobless Rate Could Fall Further

Here’s a worrisome thought for Federal Reserve officials concerned that tight labor markets mean higher inflation ahead: The U.S. unemployment rate, now at a 23-year low, may fall to as low as 4 percent in the months ahead.

“We’re literally running out of people to employ,” said Diane Swonk, deputy chief economist at First Chicago, NBD.

The continued strong economy has added about 850,000 jobs in the first four months of 1997, pushing the jobless rate down to 4.9 percent from 5.4 percent in January.

So far, employers have been able to find workers to fill most of these new jobs. Labor force growth is slowing, however.

“Arguing for a lower unemployment rate is demographics,” Swonk said. “The baby boomers are employed, and the baby busters - there’s not that many of them.”

That’s a concern to Fed policymakers charged with keeping prices in line. At some point, employers will have to pay more to attract increasingly scarce workers.

Last month the economy created 142,000 new jobs. The overall labor force, however, dropped by 221,000. Over the past three months, the labor force has grown at less than half the rate of job creation.

Further slowing in labor force growth will cause the unemployment rate to fall and put more pressure on wages. “It’s this rise in labor costs that risks ending the period of benign inflation,” said Charles Lieberman, chief economist at Chase Securities, Inc. in New York.

Underlying demographic trends show the U.S. labor force should grow at a 1 percent annual rate, Lieberman said. That implies another 1.4 million workers a year, or 117,000 per month. For the past half year, an average of 244,000 workers have been entering the Jobless rate/ labor force each month.

“If that had not occurred, the unemployment rate could be significantly lower” already, Lieberman said. If the labor force had grown last year at a pace “closer to the demographic trend, unemployment would have been about a percentage point lower,” he said.

Several factors have enabled the labor supply to keep up with the growth in jobs. The percentage of working-age people who have jobs is at a near-record level of 67.2 percent.

The good news about job creation has drawn the attention of those who had given up looking. The number of so-called discouraged workers fell by more than half a million over the past year.