Madison's Boom, California's Bust Pose Dilemma for Fed


Here in Madison, where the unemployment rate is the lowest in the nation, hamburger flippers at Wayne Harris' eight McDonald's franchises are pulling down $6.50 an hour--about 50% more than the minimum wage.

And at least one manufacturer in Madison's suburbs has become so desperate for help that he is looking for a few good workers among convicts about to be released from the nearby state prison.

As California struggles with an unemployment rate of 8.5%, an extraordinary boom is persisting all through the upper Midwest, apparently in defiance of a national trend toward slower growth. Madison's unemployment rate has ranged from 1.8% to 2.4%, which economists regard as full employment and then some, for the better part of a year.

Taken together, the persistent economic stagnation in California and the persistent growth in the heartland pose a dilemma with no neat solution for federal policy-makers, especially at the Federal Reserve, which sets monetary policy for the country as a whole.

Should the Fed hold interest rates low enough to allow the Southern California economy to grow? Or should it boost rates to prevent the economy of Madison and cities like it from overheating and generating a new spiral of inflation? Or should it play it down the middle, seeking a policy that works everywhere but risking one that works nowhere?

For now, the Fed, which raised rates steadily during the 12 months that ended in February, seems happy with the status quo. But joblessness rose in California again in May, the last month for which statistics were available, and here in the upper Midwest inflation is already creeping in under the cover of full employment.

That is making life very difficult for Jim Hammis.

Hammis is general counsel of Stoughton Trailers Inc., which has tried to attract workers by offering profit-sharing, dental care, improved medical benefits, contributions to an employee-investment program and a redesigned workweek to give the night shift three nights off. These and other benefits have added an estimated $1 million to a $40-million annual payroll, Hammis said.

"The labor market is so tight that the employees are recognizing they can get a job any place they like," he said. "The first paycheck they can pick up for a quarter more, they'll be gone."

Employers have the same option. "This could retard economic development . . . because firms will expand elsewhere," said Randall Eberts, executive director of the W.E. Upjohn Institute for Employment Research, a nonprofit job-training and research center in Kalamazoo, Mich.

Eberts said a 2% unemployment rate cannot be sustained for long. "You need a pool of workers for a company to draw from or they'll go elsewhere," he said. "Companies can't expand because they can't find qualified workers to operate equipment, engineers to develop technology, the resources they need to grow."

"I don't want to sound like I'm whining. I'd rather have these problems" than those of high unemployment, said Madison Mayor Paul Soglin. But too much prosperity has its down side.

In Wisconsin as a whole, the labor shortage has "affected or hindered" growth prospects for 58% of the manufacturers responding to a survey conducted by Wisconsin Manufacturers and Commerce, a private trade association that tracks the regional economy.

In Dane County, where Madison is located, 23% of job openings went unfilled for at least 30 days during the past year, according to the Wisconsin Job Service. The county has become a high-tech manufacturing center.

"We have an aging labor force," said Michael J. Matthews, director of economic development for Madison Gas and Electric Co. "Demographically, we'll have fewer numbers [of workers] than during the baby boom era. It won't be just regional in nature. You can't escape it because it's everywhere."

In Madison, as elsewhere, there are people whose personal problems or lack of education make them unemployable. There are others who are working but who lack health care benefits or sufficient wages to support a family.

And in a city floating in University of Wisconsin graduates, top-flight jobs are not always available. "Underemployment" remains an issue here.

Tom Nichols, director of the Center for Research on the Wisconsin Economy at the University of Wisconsin, said that widespread evidence of inflation is not crossing his desk. But anecdotal evidence is not hard to find. From 1991 to 1995, Madison was the third-hottest real estate market in the nation, with prices climbing an average of 9.8% a year.

A visit to the supermarket teaches the same lesson. On a recent day, here is how prices stacked up at the Ralphs supermarket chain in California and Copps supermarket in Madison: a 12.3-ounce box of Kellogg's Crispix, $1.99 at Ralphs, $3.13 at Copps; a 12-pack of Pepsi, $2.49 at Ralphs, $3.49 at Copps; a 5 1/2-ounce bag of Ruffles potato chips, 99 cents at Ralphs, $1.49 at Copps.

But it is employers who take the toughest blows when joblessness is at rock bottom.

Hammis is already so hard-pressed for workers for his trailer manufacturing plant that he is putting qualified applicants on the payroll even if he has no specific openings for them. He knows it will be only a matter of weeks before a job needs to be filled because someone has quit for a job that pays more or offers better working conditions.

That step alone costs the company $250,000 a year, Hammis said.

Diana Schafer, who owns Norrell Services, a placement agency hired by companies throughout the area to recruit office workers, has been wrestling with similar problems for at least a year.

"We're kind of in the thick of things," she said. Pay has gone up at least 50% over the past five years, and receptionists who a short time ago were earning $5.50 an hour are now being paid $8.50.

In mid-April, local employers held a job fair for the 400 students graduating from the Madison Area Technical College.

"It was a bust," Schafer said. "We got 30 resumes. Students know they are marketable and there are a lot of jobs out there. Networking with employers is not that important. It's an employees' market."

At the Marquip Corp., which makes heavy machinery for use in constructing cardboard, welders with three years of experience can command $14 an hour, and Mark W. Meunier, the corporate director of human resources, expresses concern about companies raiding each others' work forces and starting a wage war.

"Where do I get a machinist?" he asked. "Where do I get a welder? There is big concern here. We're talking about good wages. The economic impact it has in Madison is quite dramatic."

At the Dean Medical Center, a major health maintenance organization here, "the quality of employee has continued to decline in our entry-level maintenance areas," said Perry McCourtney, a human resources specialist. "There's a decline in the work ethic. We continue to see an increase in unexcused absences."

Nevertheless, the company has spent $700,000 on improved benefits for its 2,400 employees in the past year, giving first-year employees a total of four weeks of vacation and paid sick days annually, McCourtney said.

Doug Holtz-Eakin, a Syracuse University professor who specializes in regional economies, said the successful employers are the ones who find creative solutions.

Harris, who owns the McDonald's restaurants here, could raise salaries because he renegotiated his insurance contracts to save $8,000 a year on what had been a $40,000 to $50,000 bill.

Or employers can look for new pools of workers. The suburban Madison manufacturer who turned to the population emerging from prison is trying to fill jobs once taken by young high school graduates looking for a ticket off the family farm.

"He literally gets the names of people ending their incarceration and looks at them as potential job candidates," said John Metcalfe of Wisconsin Manufacturers and Commerce. "From recruiting farm kids, not terribly worldly, to looking at people in the prison population--it's a dramatic change."

The long-range impact on the regional economy demands careful management.

"If your costs are rising in one area, you are reluctant to do your expansion there," said Robert Schnorbus, an economist at the Federal Reserve Bank in Chicago. "You might be willing to give up some orders to a competitor, but at some point there'd be a reluctance to do too much of that.

"If you can't find the workers in one area who'll produce the goods, you've got to look for them somewhere else. If you can't find them in Madison, you go to Racine. When Racine is exhausted, you go to Des Moines. At some point it becomes a national problem."

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