l estimates of the natural rate. An alternative explanation is based on job insecurity. Unreliable evidence about layoffs and corporate downsizing suggests that US workers are more uncertain about job prospects than in the past. This uncertainty could explain low inflation in the face of a tight job market: workers might be reluctant to ask for wage increases. There are many ways to measure job uncertainty, including survey measures, wage increases in collective bargaining arrangements, days idle because of work stoppages such as strikes, and the number of workers who have become unemployed because they were terminated (rather than because they quit their jobs). What, then, can explain the recent behavior of US inflation? A hint is given by the step we omitted: the markup of prices over wages. Since recent changes in the unemployment rate seem consistent with the behavior of wages but not with the behavior of prices, logically there must have been some change in the relationship of prices to wages. Such a change could take two forms. First, firms could be adjusting their profit margins, assuming that costs other than wages have evolved normally. Second, costs other than wages could have fallen, assuming that profit margins have been stable. There is not much support for the idea that lower inflation reflects squeezed profit margins. It has been suggested that increased globalization and competition may have restrained prices; there is anecdotal evidence of a general feeling among businesses that consumers will not tolerate price increases. However, the profits of US firms have been buoyant in recent years. If competition is affecting firms' behavior, it is more likely manifested in cost containment than in less aggressive price increases. Finally, actual inflation can be influenced by expected inflation through the wage- setting process. For example, workers may respond to higher expected inflation by demanding higher wages, and firms m...
