L Ong -run Trends in Labor Su P P Ly

The recent “benign” combination of strong output growth and low inflation has led to speculation that the potential growth rate of real GDP has increased. This paper exam ines trends in labor supply to see whether this source of GDP growth might have accelerated. Discussions of labor supply often focus on labor force p a rt i c i p ation. But other considerat i o ns—s u ch as the length of the workweek,the amount of time spent away from work and the demographic structure of the population— also h ave been important in causing trend shifts in labor supply. My analysis suggests that no significant increase in the growth rate of any of these dimensions of labor supply is likely in the near future. So if potential GDP is to acceler ate, this must come from faster productivity growth. In recent quarters, the U.S. economy has achieved a “surprisingly benign” combination of strong real growth and low inflation (see Greenspan 1997). The reason it is surprising is that, typically, sustained strong real growth has led to inflationary pressures. The question of why inflation has remained low has given rise to a heated debate over whether the U.S. economy has entered a new era in which it can enjoy faster aggregate demand growth without provoking inflation. Many economists (e.g., Meyer 1997) subscribe to the view that there is some threshold level of the unemployment rate at which supply and demand are balanced in the labor market (and perhaps in the product market as well). This balance yields a constant inflation rate. If the unemployment rate falls below this threshold level (often called the Non-Accelerating Inflation Rate of Unemployment, or NAIRU), inflation tends to rise progressively over time. The current unemployment rate is widely believed to be below this threshold; hence the puzzlement at the low inflation rate.1 A possible explanation of the recent failure of inflation to rise in the face of strong GDP growth and low unemployment is that the NAIRU has declined, i.e., the level of the unemployment rate at which the supply of and demand for labor are in balance may be lower than it used to be. The argument, ex p r essed, for example, by Chairman Greenspan (1997), that technological change has added to workers’ insecurity in recent years and made them less willing to push for higher wages may be thought of as one version of this explanation. Greater insecurity might reduce the upward pressure on wage rates at any unemployment rate and so lower the threshold rate at which wages (and prices) would begin to move upward. However, any improvement in the trade-off between real GDP growth and inflation coming from a decrease in the NAIRU would be temporary. Once the NAIRU settled at a new (lower) level, further declines in unemployment coming from rapid GDP growth would again put upward pressure on inflation. Put differently, although workers may be