Unemployment Falls to 4.1%, Best in 30 Years

Joblessness in America fell last month to its lowest level in three decades without any indication that tight labor markets were ushering in a new round of wage inflation, the Labor Department reported Friday.

The double dose of good news triggered rallies in the stock and bond markets. Investors apparently concluded that the Federal Reserve, whose policymaking committee next meets on Nov. 16, would be less likely to raise interest rates.

Hourly wages grew by just 0.1% in October, the Labor Department said, half of what economists had forecast and just a fraction of September’s 0.5% rise.

Meanwhile, the jobless rate, which had held at 4.2% or 4.3% since March, finally slipped to 4.1%.

“That’s another 100,000 people who aren’t unemployed this month,” said Bill Cheney, chief economist at John Hancock, an insurance company in Boston, noting that each percentage point of the labor force represents about 1 million people. “That’s a good thing, and it will probably have long-term consequences.”

The Labor Department reported that 310,000 nonfarm jobs were added to the economy in October, a rebound from September’s unusual low of 8,000, which may have been affected by Hurricane Floyd on the East Coast. The labor force--the number of Americans with jobs or looking for jobs--grew slightly less than the number of jobs, accounting for October’s reduction in the unemployment rate.

On average, the economy has generated 160,000 new jobs a month this fall, a slower rate than last year’s average of about 240,000 jobs.

Different analysts read different meanings into the slower rate of job creation.

“You could conclude that economic growth is simmering down, just because job growth is simmering down,” said Ken Mayland, chief economist at KeyCorp in Cleveland. “But there’s a little bit of a question here. Was the job growth limited by a shrinking pool of labor?”

Tentatively answering his own question, Mayland said he believes the slowdown was connected to a gradual cooling of the economy. But he acknowledged that it is impossible to prove it from Friday’s labor report.

The last time Americans enjoyed an unemployment rate this low was January 1970, when just 3.9% of workers were jobless. The unemployment rate moved up to 4.2% the following month and kept rising through years of oil shocks, stagflation and downsizing by manufacturers.

Today’s burgeoning job opportunities appear to be helping nearly all demographic groups. Whites and Latinos posted reductions in their unemployment rates in October and the rate for blacks remained steady.

Only black men, whose unemployment rate rose from 7% in September to 7.4% last month, defied the trend. Black teenagers had mixed fortunes, with unemployment of 27.9%, a reduction from September but not quite enough to match last October’s level of 25%.

Amid the rejoicing over the widespread availability of jobs is bewilderment. Never before has the U.S. economy been able to sustain a job market this tight without kicking off inflation. Normally, once the unemployment rate dips below 6%, employers have to raise wages to attract and keep good staffs. Then they pass on their higher labor costs to consumers, causing price inflation.

All year, economists, investors and businesspeople have been looking for signs that inflation is brewing. The Federal Reserve, in particular, has twice raised interest rates as a preemptive move against inflation.

The stock and bond markets have zigzagged accordingly, as investors have seized on each new economic indicator and tried to guess whether the Fed would view it as long-awaited proof of inflation.

Economists, meanwhile, have debated without resolution the theory that technological advances have brought about a “new economy” in which unemployment can fall far lower than in the past without triggering inflation.

“The wage figure is the big paradox of this expansion,” said Cheney. “One would definitely have thought things would be accelerating now. You have to conclude there has been a structural change.”

Earlier in the week, the Fed issued a survey that seemed to find evidence of budding inflation. In its so-called beige book--a region-by-region breakdown of economic activity--the Fed reported that its regional banks were seeing price increases in certain manufacturing sectors, health care, computer chips and building materials. The beige book also called attention to the difficulties many employers were having finding people to hire.

But if these regional pressures are the first warning signs of renewed inflation, they haven’t yet fed into the national data that the Labor Department compiles.

“We have two major reports in one week that tell two completely different stories,” said Diane C. Swonk, chief economist at Bank One Corp. in Chicago. “People are going to take [Friday’s wage data] as a ‘new economy’ report, and that’s not necessarily true.”

Swonk finds evidence of inflationary pressure under the statistics’ surface. She noted that while the job market grew overall in October, about 15,000 manufacturing jobs disappeared, continuing a long trend. Jobs were created in such areas as health services, education, recreation, construction, trucking, warehousing and government services.

Since manufacturing jobs tend to pay better wages than service jobs, Swonk said wage inflation would be masked by their replacement by lower-paying service jobs.

“The Fed knows this,” she said. “Anyone who’s an inflation hawk in the Fed, I’m sure their eyebrows rose on the decline in manufacturing labor.”

Swonk said she thinks the Fed’s Open Market Committee, at its Nov. 16 meeting, will retain its stated bias toward raising interest rates but perhaps not make the move until next year.