Fallacies of the Third Round

April 5, 1948

Demands for a third round of wage increases are based on the argument that the rise in living costs has outstripped the rise in wages. Official figures show, on the contrary, that between 1939 and February of this year average hourly earnings of manufacturing workers increased 104 percent, and average weekly earnings 119 percent, while the cost of living went up only 69 percent. Only by selecting as a base of comparison June 1946, when the relationship of wages to the cost-of-living index was most favorable, can the union leaders show a slightly greater rise in living costs than in wages. And we must remember even here that the cost-of-living index under price control was largely fictional. It made no adequate allowance for black markets, unobtainable goods, and deterioration in quality.

It is, moreover, precisely the labor unions already best off that now take the lead in demanding further gains. Average weekly earnings in 25 manufacturing industries in December were $52.74. But in the iron and steel industry they were $58.20; in meat packing, $61.57; in the printing trades, $63.57; in the automobile industry, $65.47; in anthracite mining, $67.42, and in bituminous-coal mining, $75.22. Incidentally, weekly wages in the soft-coal fields were 211 percent above their 1939 level.

Such comparisons call attention to the fallacy of lump thinking about wages. That fallacy is made graphically clear in a study of the “Behavior of Wages” just completed by Jules Backman and M.R. Gainsbrugh for the National Industrial Conference Board. This study reveals not only that it is undesirable to try to impose blanket wage increases on the American economy, but that, contrary to common belief, we have never actually had such uniform increases, even in the recent past. It is widely believed that the first round of postwar wage increases was a uniform advance of 18½ cents an hour. A survey of 153 industries, however, in the period from September 1945 to February 1947, shows advances ranging from only 5 cents an hour in some industries to 30 cents in others. Out of 15,800,000 workers, only 3,700,000, in fact, were in industries which received average increases ranging between 17.5 cents and 20 cents an hour. Some 6,000,000 workers received less and some 6,000,000 received more.

From 1929 to 1939, to cite another illustration, 25 manufacturing industries show an average increase of 22 percent in hourly earnings. But the average rise was different in every one of these 25 industries, ranging from 3.6 percent in the lowest to 37.1 percent in the highest. The diversity is similar no matter what period we take.

We must remember, finally, that the wage-increase figure for each industry is itself an average. It conceals the diversity of increases among individual firms in that industry. The average increase in each firm, again, conceals the diversity among individual wage increases.

Today efforts are being made everywhere to impose an arbitrary uniformity on wages. All such efforts impede the functioning of a free economy. When a union imposes uniform wages within a single firm, regardless of differences between individual workers in merit, skill and output, it reduces or destroys individual incentives to improvement and production. When industrywide unions impose uniform national wage scales they retard or prevent the growth of industry in the South and in small towns. When government seeks to impose a national uniform increase in wages, it destroys the free market mechanism of fluid adjustment of prices, wages, and synchronized production. It prevents expanding industries from attracting workers by offering relatively higher wages while it forces violent adjustments on less profitable industries.

An attempt to impose a blanket third round of wage increases now would bring further distortions in our economy. Unless it were offset by still more monetary inflation it would mean dangerously excessive production costs which would either wipe out profit margins or force up individual prices to levels that would contract demand. In either case the result would be unemployment.