I n t h I s c h a p t e r y o u w I l L

particular, monetary growth does not influence those factors that determine the
economy’s unemployment rate, such as the market power of unions, the role of ef-
ficiency wages, or the process of job search. Friedman and Phelps concluded that
there is no reason to think the rate of inflation would, 
in the long run,
be related to
the rate of unemployment.
Here, in his own words, is Friedman’s view about what the Fed can hope to
accomplish in the long run:
The monetary authority controls nominal quantities—directly, the quantity of its
own liabilities [currency plus bank reserves]. In principle, it can use this control
to peg a nominal quantity—an exchange rate, the price level, the nominal level of
national income, the quantity of money by one definition or another—or to peg
the change in a nominal quantity—the rate of inflation or deflation, the rate of
A
CCORDING TO THE
P
HILLIPS CURVE
, 
WHEN
unemployment falls to low levels,
wages and prices start to rise more
quickly. The following article illustrates
this link between labor-market condi-
tions and inflation.
Ti g h t e r L a b o r M a r k e t
W i d e n s I n f l a t i o n F e a r s
B
Y
R
OBERT
D. H
ERSHEY
, J
R
.
R
EMINGTON
, V
A
.—Trinity Packaging’s plant
here recently hired a young man for a hot,
entry-level job feeding plastic scrap onto
a conveyor belt. The pay was OK for un-
skilled labor—a good $3 or so above the
federal minimum of $4.25 an hour—but
the new worker lasted only one shift.
“He worked Friday night and then
just told the supervisor that this work’s
too hard—and we haven’t seen him
since,” said Pat Roe, a personnel director
for the Trinity Packaging Corporation, a
producer of plastic bags for supermarkets
and other users. “Three years ago he’d
have probably stuck it out.”
This is just one of the many ex-
amples of how a growing number of com-
panies these days are facing something
they have not seen for many years: a tight
labor market in which many workers can
be much more choosy about their job.
Breaking a sweat can be reason enough
to quit in search of better opportunities.
“This summer’s been extremely
difficult, with unemployment so low,”
said Eleanor J. Brown, proprietor of a
small temporary-help agency in nearby
Culpeper, which supplies workers to
Trinity Packaging. “It’s hard to find, espe-
cially, industrial workers and laborers.”
From iron mines near Lake Superior
to retailers close to Puget Sound to con-
struction contractors around Atlanta, a
wide range of employers in many parts of
the country are grappling with an inability
to fill their ranks with qualified workers.
These areas of virtually full employment
hold important implications for household
incomes, financial markets, and political
campaigns as well as business profitabil-
ity itself.
So far, the tightening labor market
has generated only scattered—and in
most cases modest—pay increases.
Most companies, unable to pass on
higher costs by raising prices because of
intense competition from foreign and
domestic rivals, are working even harder
to keep a lid on labor costs, in part by
adopting novel ways of coupling pay to
profits.
“The overriding need is for expense
control,” said Kenneth T. Mayland, chief
I N T H E N E W S
The Effects of
Low Unemployment

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C H A P T E R 3 3
T H E S H O R T - R U N T R A D E O F F B E T W E E N I N F L AT I O N A N D U N E M P L O Y M E N T
7 6 7
growth or decline in nominal national income, the rate of growth of the quantity
of money. It cannot use its control over nominal quantities to peg a real
quantity—the real rate of interest, the rate of unemployment, the level of real
national income, the real quantity of money, the rate of growth of real national
income, or the rate of growth of the real quantity of money.
These views have important implications for the Phillips curve. In particular, they
imply that monetary policymakers face a long-run Phillips curve that is vertical, as
in Figure 33-3. If the Fed increases the money supply slowly, the inflation rate is
low, and the economy finds itself at point A. If the Fed increases the money supply
quickly, the inflation rate is high, and the economy finds itself at point B. In either
case, the unemployment rate tends toward its normal level, called the