becomes to view this improvement merely as a cyclical phenomenon. certainly, it seems to me that the accompanying low levels of inflation, together with relatively high rates of resource utilization, suggest that something more than normal cyclical forces is at work. the ability to develop and deploy these technological advances rests on underlying changes in our labor and financial markets, changes that have been occurring over the last two decades. with respect to labor markets, two main changes have occurred. first, large corporations have been increasingly willing to lay off workers and restructure their businesses during the expansion phase of the business cycle rather than waiting for a recession to do so. this process has been under way in the united states for over a decade and it has not been accomplished without pain. a crucial unanswered question in the current environment is how to identify the point at which labor market tightness becomes sufficiently severe for workers to demand more permanent pay increases. second, there appears to be a shift in the structure of compensation toward variable pay that includes, but is not confined to, stock options. this shift away from wages and traditional benefits has allowed for greater flexibility in labor costs and by this means has made it easier for new firms to add labor. employees compensated through incentive pay take on some of the risks of capital. and in highly competitive goods and services markets, consumers ’ benefits show up in the form of lower prices, rather than entirely in higher pay, with important, not yet fully understood, implications for the distribution of benefits in our economy. let us not forget the financial and corporate side of this picture as well. there is no doubt that the banking system in the united states has been far stronger in the 1990s than it was in the previous two decades. at the same time, capital markets have deepened significantly. expanded equity markets have served as important sources of finance for new businesses, while venture capital markets have provided increased access to risk capital. by some measures, new financing from these and related markets has tripled the flow of new equity capital to business in the last five years. also important has been the increased liquidity of financial assets. today, asset portfolios of loans and credit cards are easily transferable through securitization or outright sale. as a result, the corporate sector, too, has witnessed significant change over this past decade, with the formation of many new businesses and the transformation of many old ones. many of the household names today were formed sometime in the last 25 years, while a number of

mr mcdonough comments on the implications for the strong us growth for the world economy speech by mr william j mcdonough, president of the federal reserve bank of new york, before the japan center for economic research, tokyo, on 30 march 2000. * * * good afternoon, ladies and gentlemen. it is a great pleasure to be invited to speak before such a distinguished audience. my thanks to the japan center for economic research for extending such a kind invitation. this afternoon i would like to share with you some of my thoughts on the us and the world economies as we move forward into the 21st century. to do so, it is helpful to step back and take a somewhat longer - term view of how the stage was set for much of the current strong economic performance the us economy has enjoyed in recent years. in addition, i would like to comment on the implications of the strong us growth for the world economy. the united states is now experiencing the longest economic expansion in its history. this expansion, which began in april 1991, not only has reached record length, but also has done so in a far stronger manner than had been expected. most notably, inflation has been subdued, notwithstanding the most favorable labor markets that the united states has experienced in a generation, and the country ’ s fiscal accounts are in surplus. there is no question that this expansion reflects some remarkable changes in the us economy. before turning to some of the deeper trends that may help account for the remarkably good performance in the past several years, i think some key points are worth noting. as 2000 gets under way, the us economy continues to enjoy astonishing job growth. payroll employment growth has been fluctuating around 250, 000 jobs per month since early 1996. although job growth in february was considerably more modest, when figures for december and january are included, it looks as though the trend of roughly 250, 000 jobs per month is still in place. the counterpart to strong job growth has been a steady decline in us unemployment rates. in january, unemployment in the united states fell to a 30 - year low of 4 %. this level held roughly steady in february. what is particularly noteworthy is that the percentage of the population employed, at 65 %, is the highest it ’ s been in the postwar period. of considerable importance is the fact that job growth in the last few years has been increasingly centered in the segments of the population in which unemployment has been most stubborn : the more disadvantaged parts of us society, including the inner