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Jewish World Review Dec. 20, 1999 /11 Teves, 5760

Lawrence Kudlow

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Dracula's Curve -- OTHER THAN John McKinnon's news story in the Wall Street Journal, I saw no print or TV news discussion of the Urban Institute's state-by-state analysis of unemployment and wages. Too bad, because it's a very important study. Fed chairman Alan Greenspan, and his deputy Laurence Meyer, and the Fed's forecasting staff, should commit it to memory.

"We found very little evidence that wage pressures were higher in the very low- unemployment areas than in the above-average-unemployment areas," said Robert L. Lerman, an Urban Institute and American University economist. "We may well be able to go even below 4% unemployment at the national level," he said (from the Wall Street Journal article of December 14, 1999).

The Urban Institute is a centrist, generally Keynesian, Washington think tank that studies economic and social issues. It has never been identified with the supply-side tax-cutting movement or the classical school inflation theory that higher prices are caused by too much money chasing too few goods.

But, this study drives a stake into the heart of the so-called Phillips curve trade-off between inflation and unemployment.

Like the mythical Count Dracula, I'm sure the Phillips curve will rise again, in the dead of night, preying on harmless workers. In economics, as elsewhere, the forces of darkness are never completely exorcised.

Still, the Urban Institute has made an important contribution toward putting the Phillips curve in a permanent crypt. With facts. Not goofy, uncorroborated, stubborn, sloppily specified people's republic of Cambridge, Mass. econometric modeling, but actual factoids.

Namely: the eleven lowest unemployment states, with an average jobless rate of 2.2%, registered a modest yearly average wage increase of 3.4% for manufacturing average hourly earnings between 1994 and 1998.

Meanwhile, the ten highest unemployment states, with an average jobless rate of 5.1%, recorded a nearly identical increase of 3.3% for manufacturing wages. Not what the Phillips curve would have predicted.

So, lower unemployment apparently does not cause sky-high wage increases. And higher unemployment does not necessarily cause rock bottom wages.

If Mr. Greenspan still believes that a national unemployment rate of 4.1% implies "a shrinking pool of available resources" that surely will drive up wage costs and price pressures, he ought to examine the Urban Institute study. It says he's wrong.

Take Iowa, where its 1.8% unemployment rate generated manufacturing wage growth of only 2.8% per year. Or New Hampshire's low 2.1% jobless rate and 2.1% yearly wage pace.

No Phillips curve in these early presidential primary states, where Steve Forbes has criticized Fed interest rate hikes while George Bush and John McCain have defended them.

Then again, Sunbelt New Mexico and Rustbelt New York, with above average 5 1/4% average unemployment, have relatively costly 4.4% wage growth.

Working through these numbers, two big points emerge. First, manufacturing wage rates are relatively low for both the high unemployment states and the low unemployment states. They're just plain low. Second, there is no discernible Phillips curve trade-off between wage rates and unemployment rates. The data debunk the theory.

Here's a non-Phillips curve take on moderate wage behavior: low inflation from King Dollar and the absence of excess money supply. Over the 1994-98 period, the GDP chain price index rose by a tepid 1.7% annual rate. Virtual non-inflation.

So the workforce has no need to demand excessive wages or salaries. Low inflation restrains wages; rising wages do not cause high inflation. Meanwhile, worker real earnings are growing by nearly 2%.

Also, rising productivity and worldwide competition have restrained wages in the globalized Internet economy, including the U.S. "I believe in markets, including labor markets," Mr. Lerman told me in a phone interview.

Remember, too, that workers work for real wage gains, after-tax. Rather than inflated earnings or higher minimum wage laws, the workforce prefers lower personal and payroll tax-rates.

Another point. In recent years, when the economy has created a net increase of 13 million new adult jobs, job takers have been much better educated than job losers. Ninety-three percent of the new job takers are college educated, and this worker supply pool is constantly refilled. These new entrants are happy to have a job. They don't require excess wage rates.

Now, back to Greenspan & Co. I wish they'd wake up and smell the coffee. Instead of Phillips curve pontificating, how about a careful examination of the actual facts?

Bury the bias. Bury the Phillips curve. Leave people alone to work, produce and prosper. In the new Investor Class, information-age, digitized, wireless, King Dollar Internet economy, central planning is out and hard work is in. Don't punish success, reward it.

JWR contributor Lawrence Kudlow is chief economist for Schroder & Co. Inc and CNBC. He is the author of American Abundance: The New Economic & Moral Prosperity. Send your comments about his column by clicking here.


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12/10/99: Y2K-Related Cash
11/23/99: Y2K Money: Inflationary or Not?
11/16/99: Investor Retaliation
11/05/99: Rosy Lives
10/29/99: Drain Reserves
10/22/99: Supply-Side Is Mainstream
10/14/99: Y2K will likely bring more prosperity
10/07/99: Clinton's tax-cut veto
10/01/99: What's really bugging the stock market?
09/23/99: Growth Trade
09/09/99: Bad Dollar Logic
09/09/99: Buttered bread
08/31/99: Bull Market Alive and Well
08/26/99: Let Prices Rule
08/19/99: Blame OPEC, Not Growth

©1999, Lawrence Kudlow