Low Unemployment + Low Inflation

The labor force ballooned as more women, immigrants, and baby boomers sought work. Plant shutdowns were common and corporations “downsized” work forces. Real wages began a long decline. Owing to spending on Vietnam and soaring oil prices, inflation surged. Richard Nixon tried government wage-and-price controls and then recession and high unemployment. But inflation stayed up. This was “stagflation.” Some authorities decided that recessions had to be harsher. The Paul Volcker-Ronald Reagan recession of 1981 reduced inflation but eliminated millions of good jobs. Unemployment never fell below 5 percent. Unemployment did not fall below 5 percent before a new recession, which occurred during the presidency of George H.W. Bush. Most economists believed that low inflation required permanently high unemployment; their view was labeled NAIRU—the Non-Accelerating Inflation Rate of Unemployment. The late 1990s were a surprise. Federal Reserve Chair Alan Greenspan and President Bill Clinton helped to bring low inflation and low unemployment at the same time. Real wages increased more than at any time since the early ’70s.