How to Increase Jobs and Payrolls

June 16, 1958

There are mounting indications that the recession has been flattening out. A few important industries have been turning upward. Even more clearly hopeful has been the turn in political thought. Only a couple of months ago the great majority of labor-union leaders, politicians, “research groups,” and academic economists who got into print were shouting that the only way to stave off disaster was an immediate massive public-works program and/or a huge tax cut of $5 billion to $10 billion or more to give us a thundering inflationary deficit.

Though much harm has been done by the inflationary spending programs that Congress so hastily approved (and that already give us a prospective deficit for the coming fiscal year of more than $10 billion), we have been at least temporarily saved from much worse consequences by the firmness of Secretary Anderson and (after initial wavering) of President Eisenhower. There has not for a long time been so admirable an example of economic sense and political courage as the President displayed in his speech of May 20. I quote some outstanding sentences:

“Reckless expenditure in the name of economic stimulation is both wrong and self-defeating. . . . I would like to nominate for oblivion . . . the idea that the consumer is not price conscious any more . . . the notion that without paying the piper in higher prices, we can as a nation overpay ourselves for what we produce . . . the idea that large annual wage increases can be regarded as a matter of course. . . . And, finally, we must be disabused of the thought that a competitive enterprise economy can be free of all loss, failure and disappointment, and that government can take all the bumps out of the road of business.”

BLOCKS TO ADJUSTMENT

A free-enterprise economy is self-adjusting. But it must be permitted to adjust. Much of the recent improvement in the business picture has been the result of the adjustments that have already taken place—in some better products, some lowered production costs, and especially in inventories. But the chief stumbling block to further adjustment and recovery is the excessive wage rates of some industrywide unions and the insistence of these unions on still greater wage boosts.

Outstanding examples exist in the steel, electrical, and automobile industries. For half a year the steel industry has been operating at only about 50 percent of capacity. The normal adjustment of a free economy to such a situation would be a reduction of steel prices to stimulate and restore demand. But on July 1 (as the third installment of wage boosts called for in the current three-year contracts), wages of the United Steelworkers union are due to go up another 20 cents an hour or so. The unions obdurately refuse to forgo this automatic increase. So the companies are planning to raise steel prices to meet the added cost.

GM WAGE PATTERN

In 1955, General Electric negotiated five-year agreements with more than 100 unions. These agreements not only provided a cost-of-living escalator arrangement, but substantial wage increases in addition which come automatically regardless of what happens to the cost of living and regardless of whether there is prosperity or recession. “Now,” the company has said, “we look ahead to the fourth and largest increase yet, just when we are trying to pull ourselves out of recession. This increase will be a deterrent to the development of the better product values which are needed for recovery and re-employment.” The company has also expressed the opinion that “any [general] wage increase at all now holds back recovery.”

The wage-contract pattern which General Electric was forced to follow in 1955 was set by the General Motors formula of 1948. This combined automatic cost-of-living increases with automatic “annual improvement” increases. Together these have already reached a total of 90 cents an hour.

Thus the chief “beneficiaries” of this wage formula have been a few great industrywide unions. But what Walter Reuther and the automobile, electric, and steel unions are now chiefly suffering from is too many victories. It is mainly where wage increases have gone farthest that there is heaviest unemployment.

Those of us who have insisted on the need of wage adjustment to promote enduring recovery are sometimes accused of wanting to “squeeze down the workers.” Such an accusation can be honestly made only by those who fail to understand either what is being proposed or what the real effect of the proposal would be. It is not being suggested that wages should be cut generally or by, say, some flat uniform percentage. What is being proposed is that the wage rates should be cut only of the still-employed members of those top-level unions who are monopolistically profiteering at the expense of higher living costs for all the rest of the workers. And the purpose of this wage-rate cut is not to reduce the purchasing power of the class of workers whose wage rates would be cut, but to increase their living standards and purchasing power. The purpose, in brief, is to cut certain hourly wage rates in order to increase total employment and payrolls.

WAGE RATE VS. PAYROLL

What has been happening under the steadily mounting hourly wage rates in manufacturing was shown in this column of March 10. The situation has become even more striking since then. Whereas average hourly gross earnings increased from $2.05 in December 1956 to $2.11 in April of this year, manufacturing payrolls fell from an index number of 171.4 in December 1956 to 139.6 in April of this year. In other words, an increase of 3 percent in wage rates has meant a fall of 18 percent in wage payments.

The word “wages,” in short, is ambiguous, and may mean two entirely different things. A cut in the price of labor may be necessary for a rise in the employment and total income of labor. Failure to understand this elementary distinction has prevented many workers from recognizing where their real interests lie. About 20 percent of the automobile workers are unemployed because Reuther’s wage victories have priced American cars into a lower volume of sales. The remedy is clear.