Friday's report that the state and national unemployment rates had dropped to their lowest levels in more than four years might have escalated the inflation alarm among mainstream economists, but it didn't do much to convince people like Ed Meeks.
Mr. Meeks, who is in charge of hiring for Baltimore-based Senior Campus Living Inc., had been waiting since September -- when unemployment fell below its so-called "natural" level of about 6 percent -- for the tightening job market to create worker shortages and force wage boosts at the retirement centers he helps to manage.
After all, standard economic theory holds that when the nation reaches full employment, further hiring will push wages -- and inflation -- up.
Indeed, that has been one of the main premises that drove the Federal Reserve Board to raise interest rates six times in the past year in an attempt to slow growth and stave off a price spiral.
And Friday's report that the national unemployment rate slipped a fifth of a percentage point to 5.4 percent in December -- and Maryland's to 4.9 percent in November -- bolstered widespread expectations that the central bankers will raise rates yet again when they meet Jan. 31.
But now, despite three straight months of unemployment declines, area businesspeople and a few nationally known economists say that there is scant evidence of worker shortages or wage increases.
"I've been hearing that we are at the point where we can almost consider it full employment," said a skeptical Mr. Meeks, who is still getting swamped with applications for every position but nursing jobs.
"There are pockets" of shortages, he said, "But there are quite a few people who are overqualified for the positions" and willing to take pay cuts from their old jobs.
Mr. Meeks says he's not feeling any pressure to raise wages, and, even if he did, he might not pass it on in price increases to the residents of the nursing homes his company manages.
"There are too many variables to tie inflation to unemployment," he said.
But that's not what many economists believe.
The debate over the link between unemployment and inflation started in 1958, when British economist A.W. Phillips showed that wages in Great Britain increased during times of low unemployment.
On the belief that increased wages usually forced companies to raise their prices, economists soon included the "Phillips curve" in their models for economic predictions. In these, unemployment acts like one end of a seesaw: push down on unemployment, and inflation jumps up.
Later, American economists Edmund Phelps and Milton Friedman concluded that, when viewed over the long term, the economy tends to settle at a "natural" rate of unemployment. But pushing unemployment below that level sets off an inflationary wildfire that would spread throughout the economy, they said.
For most economists, the only debate since then has been over just what number the "natural" level is.
Robert Gordon, one of the nation's leading labor market economists, said U.S. economic history proves that the country is now on the verge of breaking the full-employment barrier, and may face a labor-shortage-induced inflationary spike.
"We know we had accelerating inflation in the 1960s" after unemployment dropped to about 4 percent during the Kennedy administration.
"And we know we had it in the late 1980s . . . when we had roughly the same economic conditions" appearing today, Mr. Gordon said.
Americans can expect an increase in inflation of about a half percentage point each year that the unemployment rate drops below the natural rate, he said.
But even Mr. Gordon can't explain why countries such as Japan, for example, have maintained very low unemployment and inflation rates for decades.
"This is one of the great dilemmas for the economic profession," he said. "Everything in Japan is crazy."
But a few economists wonder if one must assume that there is a trade-off between jobs and inflation.
Robert Eisner, of Northwestern University, is finishing an as-yet-unpublished study that, he says, shows there is little evidence that unemployment rates of 4 percent or 5 percent create accelerating inflation.
His study shows that low unemployment may tend to bump up prices but there is only a short-lived effect. Contrary to the standard economic theories, low unemployment doesn't set off a dangerous inflationary spiral, Mr. Eisner said.
"I have confirmed it using six different measures of inflation," he said.
Other economists are misinterpreting the evidence when they see signs of a trade-off, he believes. The inflation in the late 1960s, for example, wasn't caused by low unemployment but by the surge of spending on the Vietnam War, he said.
"I'm not indicating my economic estimates are the last word. But they raise a very serious question: Do we know what we are doing?"
He's presented the paper to some Federal Reserve bankers in an attempt to warn "You don't have evidence to support putting the economy through the wringer," he said.
Or do they?
Some economists and business people say there is some early, but clear, evidence that there is a shortage of labor and that the shortage is driving wages up.
Andrew Brimmer, who served on the Federal Reserve Board in the 1960s and 1970s, said a recent increase in intermediate producer goods -- such as flour made from wheat -- is proof that the economy is overheating and that inflation is dangerously close.
"Inflation generally starts somewhere back in materials and works into intermediate producer goods, then to retail level," said Mr. Brimmer, who now runs a Washington-based economic and financial consulting business.
But even some of those who are most convinced there is a tradeoff between unemployment and inflation say that, so far, there isn't any hard evidence of inflation in this round of low unemployment.
They insist, however, that the recent steadiness of the consumer price index doesn't mean we can maintain low unemployment without rising prices.Inflation, like the angel of death, is usually invisible until it's too late, they warn.
"We haven't been below full employment for very long, so there is very little evidence of inflation," said Joel Prakken, a former economist for the New York Federal Reserve Bank who now works for Lawrence H. Meyer and Associates, an economic consulting firm in St. Louis.
"Not much inflation has shown up, but it will unless the unemployment rate goes back up," he said.
And those on the front line of the labor market -- employers -- also don't know what to make of only spotty evidence of shortages.
At the Timonium offices of Snelling & Snelling, a temporary help agency, manager Linda Kaestner has started offering finders' bonuses for skilled industrial workers.
"We're having a problem supplying people with viable transportation and a good work history" to manufacturing plants and warehouses, she said.
If the labor market doesn't ease up soon, she will have to raise some industrial workers' wages, she believes. "I think we'll be seeing that within six to nine months."
At the same time, however, she's overwhelmed with applicants with very low and very high skills.
"We aren't paying bounties for lab technicians," she said. "A lot of these people are overqualified."
And, she said, "there is a surplus of people who don't have skills."
Likewise, Robin Hoesch, who has nine jobs to fill at the Baltimore office of Clean Harbors, an environmental cleanup firm, says it is easy to fill chemists' jobs, "But drivers are scarce right now."
With such muddy evidence, the debate over what the "natural" rate of unemployment is -- and whether there is one -- shows how economic management can be more of an art than a science, some economists say.
"This is an area of disagreement," said Lyle Gramley, a Federal Reserve Board governor from 1980 through 1985 who is now chief economist for the Mortgage Bankers Association in Washington, D.C.
Within the Fed, economists and bankers argue over what the trade-off is, and whether it isn't better to accept slightly higher inflation if it means more Americans can find jobs, he said.
"Almost everybody would agree if inflation is high enough it does have adverse effects on economic efficiency. But how high does the rate have to go before you see adverse effects? The studies on this issue are not at all conclusive," Mr. Granley said.
When the bankers make a decision, it often depends on what they believe more than the evidence around them, he said.
"This sort of thing is more seat of pants than anything else."