Fall 1999 —

The recent performance of the U.S. economy has been nothing short of extraordinary. Both inflation and unemployment reached their lowest levels in 30 years in 1998. And the unemployment rate has been under 5 percent for two years, while inflation has been declining.

Unemployment in the 1990s expansion (through 1998) is 0.8 percentage point lower than it was in 1989 at the peak of the last expansion.

How are we to account for this combination of low unemployment and low inflation? Has the labor market changed in some fundamental way to lead us to expect that this new regime will continue? Four labor-market explanations for the contemporaneous decline in unemployment and inflation are worth exploring. The first involves demographic trends over the past decade. The second is the surge in the prison population during the 1990s. The third is possible improvements in the labor market that allow better matching between workers and jobs. And the fourth is possible worker reluctance to press for wage gains in this recovery because of anxiety about job prospects.