What Is Declining Substantial Rate?

The best evidence suggests that after having risen in the 1970s and 1980s the sustainable rate in the United States has declined by between ½ and 1 percentage point over the last decade. One reason for the decline has been the decrease in the power of labor unions. Labor unions controlled almost one quarter of the labor force at their peak, but by 1996 that fraction had shrunk to about one eighth of the work force, with particularly sharp declines in the private sector. This weakening of labor's monopoly power means that labor market conditions, particularly high unemployment are more quickly transmitted into wage changes.

Another important structural feature lowering the lowest sustainable unemployment rate is the strengthening of competition in the American economy. Over the last two decades, many industries have been deregulated and foreign firms have invaded many previously sheltered domestic markets. In automobiles, telecommunications and energy markets stronger competition in the product market in effect increases competition in the labor market as well. With pressure from other often foreign or nonunion firms, wages tend to raise less during periods of strong demand reducing the lowest sustainable unemployment rate.