South-Western College Publishing - Economics  
Job Growth is Great, but it May Bring an Unwelcome Houseguest: Inflation
Topic Employment, Unemployment, and Inflation
Key Words Job Growth, Economic Growth, and Inflation
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Reference ID: A134983851

News Story The U.S. labor market expanded at a robust pace in July. The economy added 207,000 new jobs, bringing the total job increase for the year to about 1.3 million jobs. The new hiring was broadly based and indicates that American companies are optimistic about the American economy.

The retail sector accounted for about 50,000 of the new jobs, mostly in clothing and general-purpose stores. Another 30,000 jobs were added in the health care industry and 33,000 jobs were added in the leisure and hospitality industry. The manufacturing sector actually lost about 4,000 jobs, but the construction sector continued at a blistering pace, adding 7,000 jobs in July.

Economists interpret the job report as an indication that consumer spending and business investment are driving the current economic expansion, which is picking up speed in the second half of the 2005. "We are seeing very strong consumer demand in the last two months, and the business sector is picking up," said RBS Greenwich chief economist Stephen Stanley. "It feels like the economy is firing on all cylinders right now."

Increased hiring has placed upward pressure on wages, suggesting that firms are having to compete more aggressively for available workers. Average wages increased by 6 cents over June, to a current level of $16.33 per hour. To workers' benefit, this is the largest increase in wages in a year. "I think it's well deserved in the sense that it has been a tough stretch for workers," said Stanley.

Federal Reserve policy makers will keep a close eye on the wage numbers, because they are an early indicator of future inflation. With some analysts expecting lower productivity rates (measured by dividing real output by the number of hours worked), the rising wages could pose an additional threat to the success of the Fed's current attempt to provide a "neutral monetary policy", intended to hold inflation down without slowing economic growth.

Questions
1. Discuss how increased consumer demand can result in more hiring.
2. Use supply and demand to explain why wages increased by 6 cents in June.
3. Discuss why lower productivity and higher wages could sidetrack a "neutral monetary policy."
Source Vikas, "Strong Job Growth in July Sparks Fears of Higher Interest Rates," The New York Times Online, August 5, 2005.

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