Inflation? Bring It On. Workers Could Actually Benefit.<br />Economics textbooks tell us that when the unemployment rate falls below standard measures of full employment (4.7 percent, according to the Congressional Budget Office) the “wage-price<br />spiral” starts to take effect: Companies start paying more to find scarce workers, those higher wages necessitate higher prices and inflation soon becomes a nasty problem.<br />It may be because greater international competition keeps prices down; because the decline of union contracts means<br />that fewer companies give automatic cost-of-living adjustments; because consumers can compare prices so easily on the internet; because oil prices have fallen recently; or simply because, after years of low inflation, people expect price increases to be limited.<br />Discouraged workers — the millions who’ve left the labor force — might actually re-enter it,<br />and workers could find their shrinking share of national income rise again<br />But, as is too often the case when workers finally start to see some of the benefits of growth, economists are warning<br />that higher wages will lead to inflation, and they’re calling for the Federal Reserve Board to hit the brakes by raising interest rates.<br />Businesses, desperate for workers, reach deeper into the ranks of those who are still jobless, do more training to get those workers up to speed,<br />and pay higher wages as they compete to hire or retain their work force.<br />Even if prices did rise, my hypothesis is that the benefits, especially for those who haven’t<br />gained from economic growth in recent years, would exceed the costs of higher inflation.<br />But recent experience has shown us that the economy can operate at low levels of unemployment<br />— even lower than “full employment” — without inflation becoming a serious problem.
