Inflation Seen Spreading to Wages : Higher Prices Loom With Labor Shortage, Economists Say

In New York, where workers are in short supply, banks are paying top dollar to attract the lowest-level workers. “Anyone in New York will tell you that good clerical help is in short supply,” said Milton Hudson, an economist at Morgan Guaranty Bank, “and people are willing to pay generous premiums to find it.”

The situation in Los Angeles appears to be less severe. Kathleen Cooper, a senior vice president at Security Pacific National Bank, said banks there have automated many jobs out of existence and are having no trouble filling remaining positions. “When you look at the employment base in many large banks,” she said, “the direction of wages is more likely to be down than up.”

Expect It to Spread

As the banking industry demonstrates, wage inflation has not yet taken hold as a national phenomenon. Despite a rash of recent gloomy reports about consumer and producer prices, a wage-price spiral of the sort that sent the economy spinning out of control a decade ago is not in full flower--at least not yet.

But a substantial body of expert opinion holds that what is going on at New York’s banks will soon grip the nation. Rising wages, in this view, will force employers to drive prices up, and that in turn will increase the pressure on workers to demand still higher pay.

“We are now already in a cost-push inflation,” said Allan Sinai of Boston Co. Economic Advisers, one of the more pessimistic of today’s economic analysts. “We have reached a new stage in the inflation process.”

A year ago, Sinai said, inflation was caused primarily by demand for goods and services that exceeded the supply. But now the national unemployment rate is 5.1%, its lowest level in 15 years.

Workers are now in short supply, too, Sinai said, and inflation is spreading to wages. “We can see the beginning of the spiral at this point,” he warned.

For the first time since 1983, the Labor Department’s index of average hourly earnings is rising faster than 4% a year. It increased by 4.5% during the 12 months ending in February, and it grew at a 5.1% annual rate during the months of December, January and February. Data for March will be released as part of today’s report on the unemployment rate.

In recent history, there has been only one cure for a wage-driven inflationary spiral: a sharp recession in which hundreds of thousands of workers are laid off. The virulent wage-price spiral of a decade ago ended only with the deepest recession since the Great Depression.

Not all economists are as convinced as Sinai that the economy is already on that path. “We’re not at the spiraling, escalating phase of inflation--yet,” said Murray Weidenbaum, who served as chief economic adviser to President Ronald Reagan and is now a visiting scholar at the Center for Strategic and International Studies here.

“But we are seeing upticks in wages that reflect a tight labor market,” he said. “Profits have been going up rapidly, and now wages are starting to push up, too. When unemployment gets down as low as 5%, that’s certainly as low as you can expect to get it down.”.

One traditional source of wage inflation--pay hikes negotiated by major labor unions with the nation’s leading manufacturers--has not yet materialized.

“Manufacturers are not particularly worried about a big wage push in the near future,” said Gordon Richards, an economist at the National Assn. of Manufacturers. “We think a lot of the talk you hear about labor shortages is exaggerated.”

In the manufacturing sector, Richards said, capital investment and productivity have been expanding briskly, and output and profitability have been able to keep ahead of wage pressures.

The statistics bear Richards out. The Labor Department’s hourly wage index for the manufacturing sector grew only 3.4% in the 12 months ending in February and it rose at only a 3.1% rate during the months of December, January and February.

Further Drop Needed

Roger Brinner, an economist with Data Resources Inc. in Lexington, Mass., believes that the national unemployment rate must fall even below the 5.1% level of February before labor markets become so tight that they produce significant wage inflation.

But David Levine of New York’s Sanford C. Bernstein & Co. is not so sanguine. When the national unemployment rate fell below 6.75% in 1978, he notes, the wage-price spiral of the late 1970s was not far behind.

After the recessions of the early 1980s, the unemployment rate dipped below 6.75% again at the end of 1986, Levine notes. As if on cue, wage and consumer inflation promptly began rising. The producer price index shot up 1% in both January and February, and consumer prices rose 0.6% in January and a somewhat more moderate 0.4% in February.

“This doesn’t mean we’re going to go from 3% inflation to 9% in one year,” Levine said. “That will probably take four or so years, or a bit more than a percentage point of wage inflation a year. But we’re already right on schedule for that. . . . The key is that each year is a higher number than the last, and that in history we have never seen it stop accelerating without a recession.”

Brinner agrees with that prognosis. “There is obviously an overheated economy,” he said. “It’s too bad we need to throw 5 million out of work to fix it.”