The Virginian-Pilot
                             THE VIRGINIAN-PILOT 
              Copyright (c) 1995, Landmark Communications, Inc.

DATE: Wednesday, February 1, 1995            TAG: 9502010005
SECTION: FRONT                    PAGE: A12  EDITION: FINAL 
TYPE: Editorial 
                                             LENGTH: Long  :  119 lines

WHAT IS THE OPTIMUM UNEMPLOYMENT RATE? PICK A NUMBER, 1 TO 10

There is a perfect unemployment rate for our national economy - called the Natural Jobless Rate.

When unemployment rises above that rate, our economic machine is not hitting on all cylinders.

When unemployment slips below that rate, competition for workers drives up wages, so dreaded inflation occurs.

The Natural Jobless Rate, then, is the highest employment rate we can have without inflation.

When the Federal Reserve Board fine-tunes the economy, one of the factors it pays a lot of attention to is the Natural Jobless Rate. When the board believes unemployment has sunk below that rate, the board considers raising interest rates to dampen economic growth, before inflation can develop. Such decisions affect mortgage rates, loan rates, credit-card rates and every other kind of interest rate. They affect your life.

The Natural Jobless Rate is so incredibly important that it's a darned shame nobody knows what it is. More accurately, lots of people think they know what it is - but they disagree.

The Wall Street Journal recently asked various economists and business leaders whether too many Americans are at work just now.

Economists tended to agree with Martin Feldstein, a Harvard University professor and former head of the Council of Economic Advisers under President Reagan. Feldstein said way too many people are working, so inflation looms. ``We are . . . into the danger zone,'' he said.

Business leaders tended to agree with Dana Mead, chairman and chief executive of Tenneco Inc. in Houston. He said times have changed. American companies have tied wage increases to productivity gains, shifted work overseas and learned to produce more with fewer people. Thus there is no hot competition for workers to drive up wages and cause inflation.

The Federal Reserve Board sides with the economists. If they are wrong, interest rates are being jacked up, and the economy is being stifled, unnecessarily.

Much of the uncertainty about the the Natural Jobless Rate results from the federal government's inability to count well.

``The United States spends more money subsidizing the production of honey-bee wax than it does collecting federal statistics; that's a fact,'' said James Smith, a former president of the National Association of Business Economists.

He's quoted in Kevin Phillips' book, Boiling Point: Democrats, Republicans, and the Decline of Middle-Class Prosperity.

The same book notes that the United States, unlike many European countries, counts as unemployed only those people still looking for work. Part-time workers are counted as employed, even if they are looking for full-time work. People so demoralized they've given up looking for jobs aren't counted at all, though they might grab a job if it popped up in front of them.

Thus the true unemployment rate can be much higher than the Labor Department says. That department, for example, estimated 9.8 percent were unemployed in Detroit in the spring of 1990, when the Census - an actual count - reported 19.7 percent unemployed.

That's an extreme example, but there are many more.

With so much at stake, and with talk of putting millions of welfare recipients to work, you would think we could count better. Of course, honey-bee wax is important.

There is a perfect unemployment rate for our national economy - called the Natural Jobless Rate.

When unemployment rises above that rate, our economic machine is not hitting on all cylinders.

When unemployment slips below that rate, competition for workers drives up wages, so dreaded inflation occurs.

The Natural Jobless Rate, then, is the lowest unemployment rate we can have without inflation.

When the Federal Reserve Board fine-tunes the economy, one of the factors it pays a lot of attention to is the Natural Jobless Rate. When the board believes unemployment has sunk below that rate, the board considers raising interest rates to dampen economic growth, before inflation can develop. Such decisions affect mortgage rates, loan rates, credit-card rates and every other kind of interest rate. They affect your life.

The Natural Jobless Rate is so incredibly important that it's a darned shame nobody knows what it is. More accurately, lots of people think they know what it is - but they disagree.

The Wall Street Journal recently asked various economists and business leaders whether too many Americans are at work just now.

Economists tended to agree with Martin Feldstein, a Harvard University professor and former head of the Council of Economic Advisers under President Reagan. Feldstein said way too many people are working, so inflation looms. ``We are . . . into the danger zone,'' he said.

Business leaders tended to agree with Dana Mead, chairman and chief executive of Tenneco Inc. in Houston. He said times have changed. American companies have tied wage increases to productivity gains, shifted work overseas and learned to produce more with fewer people. Thus there is no hot competition for workers to drive up wages and cause inflation.

The Federal Reserve Board sides with the economists. If they are wrong, interest rates are being jacked up, and the economy is being stifled, unnecessarily.

Much of the uncertainty about the the Natural Jobless Rate results from the federal government's inability to count well.

``The United States spends more money subsidizing the production of honey-bee wax than it does collecting federal statistics; that's a fact,'' said James Smith, a former president of the National Association of Business Economists.

He's quoted in Kevin Phillips' book, Boiling Point: Democrats, Republicans, and the Decline of Middle-Class Prosperity.

The same book notes that the United States, unlike many European countries, counts as unemployed only those people still looking for work. Part-time workers are counted as employed, even if they are looking for full-time work. People so demoralized they've given up looking for jobs aren't counted at all, though they might grab a job if it popped up in front of them.

Thus the true unemployment rate can be much higher than the Labor Department says. That department, for example, estimated 9.8 percent were unemployed in Detroit in the spring of 1990, when the Census - an actual count - reported 19.7 percent unemployed.

That's an extreme example, but there are many more.

With so much at stake, and with talk of putting millions of welfare recipients to work, you would think we could count better. Of course, honey-bee wax is important. by CNB