Can U.S. Prosperity Avoid INFLATION?

• Author: DUNKELBERG, WILLIAM C.

Despite recent gains by organized labor and the lowest unemployment rate in three decades, careful control of the money market is keeping the economy on an even keel.

FOR A BRIEF MOMENT, the conclusion of the United Parcel Service strike made it look like "old labor" was back, able to flex its muscle (reinforced by Federal labor laws) and bring a very successful company to terms that at least gave the impression of a virtual sweep by labor. Warnings that a one-sided settlement would disadvantage UPS competitively and cost jobs in the long mn, as was the case for steel and auto workers, were dismissed as "management rhetoric." These warnings were ignored, even though time has proven the predictions to be true as the U.S. has lost most of its basic steel industries and foreign competitors have captured a third of the American auto market with superior products at competitive prices.

The situation has changed dramatically again. Jobs have been lost; Federal Express and the Post Office are more profitable and have more business; and UPS announced a rate increase to maintain its profitability, as predicted by analysts. Financial markets that once worried that a resurgence in organized labor might force wages up too quickly and cause inflation have been comforted by the political collapse of the Teamsters and the public embarrassment of organized labor in various union election scandals.

At the peak, about 35% of the workforce belonged to a union, but that was nearly half a century ago. Today, barely 15% of the workforce is unionized and union strength currently is in such white-collar segments as education and government office workers. However, union membership is not the real issue. Rather, it is whether wages rise faster than productivity, regardless of the cause. Historically, the worry was about unions pushing wages up too quickly. Today, it is about competition for workers pushing wages up too quickly (Federal Reserve System Chairman Alan Greenspan's major concern). The National Federation of Independent Business, with more than 600,000 member finns, reported that a record 28% of all companies have at least one hard-to-fill job opening and a record 20% planned to expand employment, while 30% cited raising labor compensation. The highest percentage of the U.S. population in history is employed, and the unemployment rate is the lowest since the boom of the 1960s.

Labor costs account for about 70% of business expenses; consequently, its growth is important. Unit labor costs are defined as hourly compensation per hourly output. If compensation increases at the same pace as output per worker, unit...