Roanoke Times
                 Copyright (c) 1995, Landmark Communications, Inc.

DATE: SUNDAY, May 30, 1993                   TAG: 9305280021
SECTION: BUSINESS                    PAGE: B-2   EDITION: METRO 
SOURCE: BY JOHN M. BERRY THE WASHINGTON POST
DATELINE: WASHINGTON                                LENGTH: Medium

HOW MUCH JOB GROWTH DOES A HEALTHY ECONOMY NEED?'

The answer, surprisingly, is that a "full employment" economy wouldn't look very different from our actual economy - which is running a 7 percent unemployment rate.

The reason, in part, is that most economists define "full employment" as an unemployment rate of 5.5 percent, which they say is the lowest possible without fostering inflation. Given that, the economists are probably right in arguing that there is much less slack in the economy than the familiar recitation of employment and jobless figures would imply.

According to calculations by the Congressional Budget Office, the United States last year would have produced about 4 percent more goods and services than it actually did if the economy had been operating at full employment. In the deep recession of 1981-82, the comparable shortfall was twice as great.

Put another way, the U.S. inflation-adjusted gross domestic product grew 2.1 percent between 1991 and 1992, so the shortfall was equal to about two years' worth of growth.

Though macroeconomic statistics are no comfort to someone who is unemployed, there is also a surprisingly small gap between the current number of jobs and the number that would exist at full employment.

If about 1.3 million more people had been at work last month, in addition to the 118.4 million who were, the unemployment rate would have been 6 percent.

Some analysts, such as economist Robert Gordon of Northwestern University, believe 6 percent - not 5.5 percent - is the real level the jobless rate can fall to without causing inflation to accelerate.

Gordon and other economists refer to that number as the "natural" unemployment rate, because it is determined by the nature of the economy and labor force.

It is also known as the nonaccelerating inflation rate of unemployment.

A larger number of analysts, including those responsible for the Congressional Budget Office estimates of full employment gross domestic product, believe that while the rate may have been 6 percent a decade ago, it is lower now.

Changes in the composition of the labor force, such as the shrinking share for teen-agers, who always face much higher unemployment rates than do adults, have reduced the rate, perhaps to the 5.5 percent rate used by Congressional Budget Office for 1992.

Laura D'Andrea Tyson, chairman of the Council of Economic Advisers, said recently she would put the figure at 5.5 percent or 5.6 percent.

The council estimated that in this decade the labor force will grow 1.2 percent a year, half the rate of its expansion in the 1970s.

With a much slower labor force growth rate now, the number of new jobs needed for the added workers is much smaller than in the past.

Similarly, the rate of growth in real gross domestic product needed to reach the full employment level is far lower than the 4 percent growth rate that economists assumed was needed in the 1960s just to keep the unemployment rate steady.

The Clinton administration's forecast, for example, shows that growth of a little more than 3 percent this year and next would be enough to knock the unemployment rate down to about 6.25 percent late next year.

When council Chairman Tyson saw a report that John F. Welch, chairman of General Electric Co., had complained that uncertainties surrounding President Clinton's economic and health reform plans would hold growth to a "modest" 3 percent this year, she saw no problem.

"You could take out the word "modest,' " she said.