Theory holds that when the unemployment rate goes below a certain point, wages rise and inflation accelerates. With the U.S. unemployment rate under 5 percent since mid-1997, economists now believe the natural rate is lower, but aren't sure how much lower. One thing they are sure of, though, is that wages can and should keep rising at a healthy clip as long as productivity grows at a healthy rate. Indeed, productivity has grown at an annual rate of at least 2 percent for the past four years, a big improvement over the roughly 1 percent growth rate over the preceding 20 years. This relationship is important because wages can then grow without sparking a dangerous level of inflation, or so goes conventional economic theory.
Economists argue over whether the productivity upturn is a sustainable trend or just a blip.
They argue, too, over exactly why it's occurred, though many believe it's the product of leaps in technology. Tight labor markets may play a positive role, too, managers say. For instance, TGI Friday's restaurants have increased productivity recently by redeploying servers and adopting new technology. Servers now pick up completed orders from the kitchen even if those orders are destined for other servers' assigned tables. On the technology front, TGI Friday's have installed computerized seating systems, giving managers a better handle on when tables open up for customers.