Spreading Labor Shortages Seen as Signal of Inflation : Economy: Bustling Indiana county is typical of many areas. Fed may react as material costs, wages head upward.

If you want to know why the nation’s central bank is worried about inflation, just take a short jaunt around this bustling manufacturing center.

Take a peek in the unemployment office. The lobby, where jobless applicants come to collect unemployment checks, is quiet as a morgue. A bulletin board lists scores of job openings in local factories, shops and offices.

Stop by Coachmen Industries and watch a steady stream of hulking recreational vehicles roll off the assembly line. The company is straining to fill RV and trailer orders from dealers.

Drive further down Highway 13 past corn fields in the rolling Amish countryside, where scores of small manufacturing plants are adorned with “Help Wanted” or “Now Hiring” signs.

Throughout Elkhart County, 20 miles east of South Bend and abutting the Michigan border, there is a severe labor shortage. The unemployment rate is 3.6%, considered full employment by many economists. The nation’s jobless rate is 6.3%.

“In this area, anybody who wants to work is working,” said Dennis Richey, general manager of Patriot Homes, a builder of mobile and modular homes. “We simply can’t get enough good help.”

Such labor shortages are beginning to appear throughout the Midwest and South. The Federal Reserve’s latest regional report on the nation’s economy found spot job shortages in the Chicago, St. Louis and Atlanta districts.

“It’s moving beyond just spot shortages,” said David Allardice, economist for the Federal Reserve Bank in Chicago. “It’s pretty widespread.”

What worries some economists is that labor shortages can be a precursor of inflation. With many factories running near capacity, pressures are building to increase wages even as productivity is dropping. Prices of key materials such as steel and rubber are up. This means higher production costs, which ultimately could push up prices for consumers.

“This is exactly what the Fed is worried about,” said Diane Swonk, regional economist for First Chicago Corp.

The fear that the Fed might raise interest rates for the sixth time this year has spooked the stock and bond markets. Many traders expect the Fed to raise short-term interest rates again soon, perhaps as early as Tuesday when its policy-making board meets.

As Californians and others are painfully aware, labor shortages are hardly universal. The East and West coasts are still just recovering from the last recession. California continues to take severe blows from the shrinkage of defense and aerospace, and major layoffs continue nationwide as corporations downsize to become more efficient. Even the Midwest, which is abuzz with manufacturing activity, has urban centers with stubbornly high unemployment rates.

Moreover, much of the job demand is for low-wage, low-skilled workers, not for laid-off aerospace engineers. There is little incentive for unemployed people to move hundreds of miles for such jobs, which are likely to be wiped out in the next downturn.

Nowhere is the labor shortage more critical than in Elkhart County, home to about 156,000 people and a center of the recreational vehicle, manufactured housing and van conversion industries.

The area’s economy--sensitive to swings in interest rates and consumer confidence--is considered a bellwether of the national economy. And local economists say Elkhart’s growth will continue into 1995, with a 3% increase in jobs expected.

But where those workers will come from is anyone’s guess.

The lack of labor is so severe that last month, the Greater Elkhart Chamber of Commerce went looking for workers, placing help-wanted ads in newspapers in 12 cities nationwide with double-digit unemployment. The ads invited those interested to call a toll-free telephone number for more information.

“Our telephone lines lit up like a Christmas tree,” chamber President David Germain said.

The business group sent about 1,500 packets of information and said a handful of workers have already been hired. Germain said the goal is to place about 500 workers in area companies this year.

Coachmen’s recreational vehicle division, located in the Amish village of Middlebury, could use another 100 employees to help turn out more motor homes, trailers and campers. That would increase its 1,300-member work force by 8%.

“More people would give us the flexibility to work split shifts or add more shifts,” said Michael Terlep, executive vice president. “We could expand production or add new facilities.”

Instead, with the company’s plants operating at full capacity and employees putting in 10- to 12-hour days and working Saturdays, Coachmen officials fear that they will begin losing orders to its competitors, such as Fleetwood Enterprises in California or Winnebago Industries in Iowa.

Some Elkhart firms have already lost business. Indiana Wood Products, which makes wooden pallets and boxes, recently had to return order deposits to several customers because the company lacked the labor to do the jobs.

“For the first time in our history, we had to turn away business,” General Manager Lamar Lantz said. “It cost us about $250,000.”

Businesses like Indiana Wood are particularly vulnerable because they use unskilled workers and pay them just above minimum wage. With labor in short supply, higher-paying manufacturing companies are luring away the best of these workers, hoping to train them for semi-skilled jobs.

The shortage has prompted companies to be creative in their hiring. Some are offering signing bonuses; some pay finder’s fees to employees who bring in recruits who are hired. A few companies have quietly dropped standards, such as requiring pre-employment drug screenings.

Still others are reviewing their pay scales, increasing wages or providing incentive bonuses tied to productivity and quality. Some companies are providing transportation to workers without cars.

Middlebury Hardwood Products, which makes cabinets for RVs and mobile homes, is raising its starting wage and bought a bus to transport workers from nearby towns. It added a second shift and needs 20 more workers to run it.

“It’s been panic time,” said Lee Martin, the company’s chief financial officer. “The customers are going nuts. If they have a unit done without doors, it’s no good to them.”

It is not just the manufacturing sector that is hurting. Hardee’s, a fast-food restaurant, offers a $100 signing bonus for new employees who stay on the job for 100 days.

Das Dutchman Essenhaus, an Amish-style tourist stop near Middlebury, has sent 9,000 circulars through a six-county area seeking workers. It has developed an incentive bonus plan for longtime workers and signing bonuses for short-term help.

The operation, which employs 350 at its gift shop, hotel and a restaurant that can serve 6,000 meals a day, has seen its labor costs rise 3% in the last quarter alone.

“Our labor costs are up not only because we are paying more, but our training costs are up because the turnover is higher,” Essenhaus owner Bob Miller said.

But the wage pressures have been greatest for manufacturers, particularly in the RV and automotive supply businesses, where the average hourly pay is $14 an hour. Workplace raids and bidding over prized employees is commonplace.

“We have lost some of our better employees to the competition,” said Harry Tallman, vice president of human resources for Starcraft Automotive Co., a van conversion firm based in Goshen. “There have been wage wars.”

The labor shortage prompted Starcraft to begin a review of its wage and benefit plans with an eye toward becoming more competitive. But instead of raising hourly wages, the company is likely to offer bonuses tied to productivity and quality.

“We don’t want to bid up our wages,” Tallman said. “It’s dangerous to do so in a cyclical industry.”

One result of the shortage has been the hiring of unskilled or unmotivated workers, said Richey of Patriot Homes: “We have some people I would replace in a heartbeat if I could.”

Others complain of workers jumping from job to job.

But in an industry that tends to suffer peaks and valleys, it is not surprising that workers will jump at the best offer. The RV industry is known for periodic layoffs and for having poor long-term benefit plans.

Morton Marcus, economics professor at Indiana University in Bloomington, argues that the situation in Elkhart highlights the failure of U.S. companies to provide workers with the training and financial incentives to increase productivity.

What is happening in Elkhart takes on added importance because the community’s economy tends to foreshadow where the national economy will be in three or four months.

John Peck, economics professor at Indiana University in South Bend, said Elkhart tends to be ahead of the curve entering and leaving recessions because the RV industry--accounting for 20% of Elkhart’s jobs--is very sensitive to swings in interest rates and consumer confidence.

“The RV industry serves as a good leading economic indicator,” he said.

What Elkhart’s story says to some economists is that inflation is a real concern.

Fred Herschede, economics professor at Indiana University in South Bend, said there are numerous signs of inflation, including labor shortages, falling productivity, higher unit labor costs and increasing demand. Without Fed intervention, he projects inflation hitting 4% next year.

Such pressures are especially evident in the auto industry, which is running its factories at near capacity. Every one of Ford Motor Co.’s U.S. plants, for example, operated on overtime this week.

The strained capacity is leading to lower productivity because the efficiency gains of recent years are now being offset by higher labor costs, training costs and lower quality caused by long work days.

“Even though wage gains may be modest, if you couple that with the drop in productivity, you will get an increase in unit labor costs that will build price pressures,” Herschede said.

Meanwhile, export demand is likely to grow as the European and Japanese economies recover. And raw material prices, notably steel, have been rising.

Back in Elkhart, companies continue to scramble to fill orders and hire workers. They worry about what the Fed may do, concerned that too strong a move will slow growth too much and ultimately bring on recession.

“When things are good in Elkhart, they are very very good,” said Tallman of Starcraft. “When they are bad, they are very, very bad.”