Economic Report of the President

These projections for employment and the labor force imply thatthe unemployment rate at year-end 1981 will be between 7V% and 7%percent, although it is likely to be above this range in the early partof 1981. During 1982 the unemployment rate is projected to declinesteadily, ending the year in the range of 7Vi to 7V2 percent.Wage and Price DevelopmentsWages and prices should decelerate over the next several years.Several factors will be at work. With both fiscal and monetary policyaimed at continued restraint in aggregate demand, the prospects arefor modest economic growth through 1982. These developmentsshould limit demand relative to supply in both labor and productmarkets, gradually reduce inflationary expectations, and ultimatelyyield a better wage and price performance. At the same time, expandedtax incentives will spur investment and thus improve productivitygrowth. This too should contribute to moderating wage andprice increases.As discussed in Chapter 1, however, reducing inflation via demandrestraint and increased productivity does not yield quick results. Furthermore,a number of factors will serve to keep inflation relativelyhigh in the near future. These will include higher food price inflation,the recent increases in social security taxes and the minimumwage, and the continued rise in energy prices resulting from furtheroil-price increases and the decontrol of domestic energy prices.These factors suggest that wage and price increases during 1981 maynearly match those recorded in 1980.Wages and Unit Labor Costs. After showing moderation through mostof 1979, wage rates accelerated last year. While the relatively slacklabor market will limit further wage acceleration this year, there isunlikely to be any noticeable slowdown. Both oil and food prices willrise sharply in 1981, maintaining the pressure for sizable wage gains.But by 1982, with continued restraint in aggregate demand andlower food- and oil-price rises (decontrol will be completed), the rateof pay increase should diminish, returning to the vicinity of wa^egains seen in 1979.Private wages and fringe benefits are projected to increase 10 tolOVfe percent during 1981. In addition, the jump in payroll taxeswhich occurred on January 1, 1981 added slightly over one-half percentto the level of compensation. As a result, increases in totalhourly compensation should average about lOVa to 11 percent overthe 4 quarters of 1981, with a large bulge in the first quarter. Withonly a modest boost in payroll taxes scheduled for 1982, the rate ofincrease in total hourly payroll costs should slow noticeably.In the face of sluggish economic activity in the first half of 1981,productivity could well record a slight decline. Thereafter, with the174