Efficiency and More Jobs--so Much for Predictions

When the Federal Reserve last week raised interest rates to cool the economy, it cited fears that labor shortages--of all things--would spark an inflationary spiral in wages and prices.

It’s a fear that Fed Chairman Alan Greenspan voiced recently when he told business leaders that the economy now is growing faster than the available pool of workers who can fill the jobs. “Clearly that is unsustainable,” Greenspan declared at the end of October.

So the Fed raised interest rates, and it may have to raise them further next year, some economists predict, because labor shortages will persist.

How on Earth did we end up with a labor shortage?

It’s an amazing turn of events, given that economic experts have predicted for years that industrial restructuring or the computer and automation or rising imports would leave millions of Americans out of work or condemned to menial jobs at minimum wages.

Why were those predictions off the mark? Because they didn’t take account of changes in the way U.S. industry is achieving more output from labor and capital--not by cutting workers but by working differently.

The economy is simply performing better. Noninflationary increases in U.S. living standards have been greater in recent years than in the 1970s and ‘80s.

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Wages have been rising, to be sure. The Fed is not imagining things. Since 1997, when U.S. unemployment fell below 5% for the first time in 24 years, average real wages (that is, after adjusting for inflation) have gone up more than 3% a year. That’s actually a healthy trend, considering that wage growth had been flat to negative since 1972. It’s about time the average worker got a little more in the pay packet.

And the trend is likely to continue for several years, says Diane Swonk, chief economist of Chicago-based Bank One. The kinds of labor shortages that have been prevalent for years in the Middle West are now the rule in all parts of the country, Swonk points out.

The automobile industry today employs 100,000 more people than a decade ago. The story is similar for other traditional industries. And new companies offering new kinds of services, from design to finance, have arisen.

Help-wanted signs on stores and anecdotes about fast-food outlets offering bonuses to attract counter help have become commonplace. Retailers now are warning shoppers to expect fewer salesclerks this holiday season.

How can jobs and efficiency be growing at the same time?

For insights and answers, look at a group of companies organized by S.A. “Tony” Johnson, chairman of Hidden Creek Industries, a Minneapolis-based management company.

Johnson, 59, an automotive engineer, has put together two public companies in the last 20 years that supply parts to the major automobile manufacturers here and in Europe.

Tower Automotive, based in Grand Rapids, Mich., now has more than $2.5 billion in annual sales of parts to all the major U.S. and Japanese manufacturers.

Dura Automotive, based in the Detroit suburb of Rochester Hills, will reach close to $2 billion in sales this year making components for auto makers in the U.S. and Europe.

Johnson, who left Cummins Engine in 1981 to start his own business, also has put together a privately held parts supplier to the heavy-truck industry, and he is currently organizing a consolidated supplier of services to the motor industry. In addition, Johnson owns Saleen Performance, an Irvine company that modifies Mustangs and other high-performance cars.

Scores of acquisitions have created Johnson’s companies, but the intent was not to scrap operations or lay off employees. “It was to attain critical mass,” Johnson explains, so his companies could invest in information systems and in research and development to keep up with the big auto manufacturers.

From a single facility in Bardstown, Ky., for example, Tower Automotive supplies both Ford’s factory in Louisville and Toyota’s in Georgetown, Ky., keeping a constant stream of parts flowing in a just-in-time system using fleets of trucks controlled by information networks.

The result is lower inventory expense for Toyota and Ford, more efficient delivery and operations for Tower, more output and greater profit for all the companies involved.

Such efficient operations also mean full paychecks for employees of all the factories involved--which translates into higher consumer spending throughout eastern and central Kentucky. That’s how productivity gains produce rising living standards.

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But will labor shortages stop that beneficial cycle? Not necessarily, Johnson says. “If labor is in short supply, we’ll just have to train more people to do higher skilled jobs and automate the less skilled jobs.”

That amounts to a prediction that the U.S. economy’s current pattern, in which investment in information technology leads to rising productivity and consumer spending, will continue.

“The profits of manufacturing have financed a lot of other activity in the Middle West in recent years,” Swonk says.

And with industrial consolidation and restructuring spreading to Europe and Asia, the global economy may well achieve U.S.-style full employment.

What may really be happening, says Professor Daniel J.B. Mitchell of UCLA’s Anderson School of business management, is not so much a “new” economy as a return to wage patterns that had been in retreat.

Mitchell notes that recent wage settlements in the automobile industry “were for 3% raises plus cost-of-living adjustments--plus a lump-sum bonus for union members to sign the contract.” The settlement at Boeing was similar, with 3% annual raises and a lump-sum payment.

Labor shortages, with the need to keep workers content, won those settlements for the auto workers and the aerospace machinists. And labor shortages will set the pattern for the U.S. economy in the next few years.

“Employers will bid more to attract and hold workers, and the Fed will continue to raise interest rates,” Swonk predicts. “That pattern can go on for years before the economy stalls out.”

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James Flanigan can be reached by e-mail at jim.flanigan@latimes.com.

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Why Fed Raised Eyebrows

Federal Reserve policymakers’ fears that labor shortages could lead to rapidly rising wage inflation are not a fantasy. As the chart shows, gains in real wages (that is, after adjusting for inflation), began a rise in 1997 after being stagnant for most of the previous 25 years. That’s not to say that there’s anything wrong with fatter pay packets, but the Fed’s aim was to prevent an inflationary acceleration in labor costs. Gains in real wages:

1999:* 3.2%

*Estimate

Source: Diane Swonk, chief economistg, Bank One.