Upward Mobility in a High-Pressure Economy

Abstract

Upward Mobility i n a High-pressure Economy THE CHOICE OF AN AGGREGATE TARGET of resource utilization remains one of the key issues facing policy makers and macroeconomists. Obviously, fuller utilization of labor and capital brings benefits in the form of extra incomes, output, and jobs; at the same time, it clearly imposes costs by increasing inflationary tendencies. Various economists see these benefits and costs very differently. Henry Wallich once suggested that macroeconomists could be classified into advocates of "high pressure" and "low pressure" operation of the economy.' At the present time, the controversial range for the target unemployment rate extends from 4 to 5 percent. Generally, high-pressure advocates concede that, with existing labor market institutions, unemployment rates below 4 percent would be associated with unacceptable inflation; while most low-pressure advocates agree that un-One part of the gap calculation is merely a piece of arithmetic. If participation rates, average hours, and manhour productivity are held constant, the extra jobs associated with reducing the unemployment rate from 5.0 to 4.0 percent would add 1/95 to total labor input and, by assumption, that much-1.05 percent-to real output. Various researchers have obtained similar results in estimating the lengthened workweek-increased overtime and diminished part-timeassociated with reduced unemployment. Black and Russell, Thurow and Taylor, Perry, and I, have all found that the increment in total manhours due to the lengthening of the workweek is between 0.35 and 0.5 percent for a drop of 1 percentage point in the unemployment rate.3 Taylor and Thurow explicitly recognize the use of overtime as a temporary buffer in periods of rapid growth of output; holding the growth of output constant, they estimate that the workweek expands by 0.4 percent for a 1 percentage decrement in the unemployment rate. Perry's estimate standardizes for differences in average hours among various demographic groups; he finds an increase of 0.35 percent in average hours for a decline of 1 point in the official unemployment rate. I grasped originally at the straw of a calculation of normal labor force by the Bureau of Labor Statistics and guessed that there might be three "hidden unemployed"-people not seeking work actively who would take jobs in a high-utilization economy-for every ten recorded unemployed in excess of a 4 percent unemployment rate. Other studies have generally produced much larger estimates of the number of hidden unemployed. But some of the largest estimates of the participation response are based on statistical techniques that may create an upward bias, as Jacob Mincer demonstrated.4 Perry's recent study disaggregates the demographic groups 3.

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