Scarcity of Workers Could Signal Upturn in Wages and Interest Rates

The lowest unemployment rate in six years has economists wondering if there are enough American workers to go around.

Scattered shortages are showing up across the country. In Minnesota, northern Michigan, Montana, and the Dakotas, there's a scarcity of skilled printers, manufacturing technicians, and computer-design specialists. Manufacturers in Virginia, Maryland, and West Virginia report production is hampered by a lack of skilled labor. And Iowa, northern Illinois, and southern Michigan also report a dearth of labor in some areas.

The nation's 5.3 percent unemployment rate in June, released on Friday, indicates that the economy is surprisingly strong. Economists are also puzzling over what that will mean for wages, interest rates, the stock market, inflation, and the November elections. Among the questions now up in the air:

*Is the economy growing too fast? When the Commerce Department reports the second-quarter gross domestic product Aug. 1, economists now expect the data to show the nation's economy is expanding at about a 4 percent annual rate. This is higher than the Federal Reserve believes the economy can grow without inflationary consequences.

*Will the low unemployment rate allow unions to seek higher wages in upcoming negotiations? The AFL-CIO is now engaged in a campaign called "Give America a Raise." In the past, such campaigns have fizzled because employers could find replacement workers for strikers. Now the Federal Reserve reports that there are labor shortages in many sections of the country. Last month the economy created 239,000 new jobs. Although most were in the service sector, many new jobs were also in construction, a high-paying area.

The average hourly earnings in June rose by 0.8 percent, the largest jump since the Commerce Department started tracking this information. Economists are not sure if this is a statistical quirk or a sign that wages are suddenly rising.

*Will inflation be rekindled? Over the last several months, there have been few signs of inflation in either the consumer price index or the wholesale price index. Instead, inflation has been holding at less than a 3 percent annual rate.

While analysts debated these positions, investors quickly reacted. On Friday, the Dow Jones Industrial Average plunged 114.88 points and the bond markets fell.

The market's reaction was a result of investor concern that the Federal Reserve, which declined to raise interest rates last Wednesday, will have to raise rates either this week or in its next meeting Aug. 20.

"It's a matter of credibility," says Brian Fabbri, an economist with Paribas Capital Markets in New York.

While the stock market was reeling, the White House was ebullient. On Friday, President Clinton compared the June unemployment rate with the figure when George Bush was president. (At the end of Bush's term, the unemployment rate was 7.8 percent.) "The important economic statistics are as favorable now as they have been before any election in the past," Mr. Fabbri says.

Last week, the White House spent a considerable amount of effort crowing over the economy. On Wednesday after the Fed decided not to raise interest rates, Henry Cisneros, secretary of Housing and Urban Development, scheduled a phone conference with reporters across the country to take credit for the boom in home ownership.

While the low unemployment rate may be good political news, economists are divided over what it means for the economy. With such a low unemployment rate, Dan Seto, a senior economist with Nikko Securities International Inc. says, "We theoretically begin to generate some friction, such as labor shortages and wage hikes."

Citibank economist Ram Bhagavatula says he believes the unemployment rate may continue to fall to lower levels because of a demographic change - the overall size of the work force is starting to shrink as the baby-boom generation reaches retirement age. As a result, he says, "full employment" may be lower. "One doesn't know these things with any great precision," he adds.

Labor economist Audrey Freedman says the economy is flexible enough to avoid problems from low unemployment. For example, manufacturing companies now use temporary-employment firms to fill job openings. This allows a company to avoid paying health-care and retirement benefits, and try out potential employees. In the latest job numbers, there is evidence that this trend is continuing, as manufacturing employment dropped while temporary employment rose.

Ms. Freedman says employers can now increase wages without increasing manufacturing costs because of savings from moving workers to managed health-care plans. "Now that the inflation in health care has stopped, or in some cases reversed, you can put that money into wages," she says.

The Clinton administration says rising productivity is making room for higher wages without the risk of worsening inflation. There has been a boom in business investment for the past several years. But those investments are starting to go down.

The Fed is not likely to be swayed by these arguments. Bond-market traders expect the Fed to increase interest rates by at least one-quarter of a percentage point. On Friday, short- and long-term rates rose by that much. Long-term government bonds are now yielding more than 7.15 percent.