The Cost-Price Squeeze

November 4, 1957

The dispute still boils concerning who or what caused the present inflation. “Labor” and “management” are now blaming each other. Insofar as this dispute is relevant, management has considerably the better of the argument.

The attack on management has been carried on by Walter Reuther on his own, and by other labor spokesmen in the Kefauver hearings. Reuther contends that “exorbitant” profits, not wages, have been the villain promoting inflation. Otis Brubaker, research director of the steelworkers’ union, declares: “Wage increases have not caused a single price increase in twenty years.”

In its October letter, the First National City Bank of New York points out in reply: “Regardless of what year is taken as a base [from 1939 on] wages and total employment costs in the steel industry have far outstripped gains in productivity. Measuring from 1940, the gain in productivity of 56 percent, while substantial, fell far short of increases in hourly earnings and total employment costs amounting to more than 200 percent. The result . . . was an approximate doubling of unit labor costs with inevitable pressure for higher prices.”

PROFIT-MARGIN FALL

A much wider study of the same problem was published by the National Association of Manufacturers in September. It finds that the history of manufacturing since the end of the second world war has been one of rising costs per unit of output—particularly labor costs and taxes. Compensation of employees rose 23 percent per unit of output between 1948 and 1956. Corporate taxes rose 32 percent on the same basis. But prices of manufactured goods rose only 10 percent. The result has been a reduction of 25 percent in profit per unit of output between 1948 and 1956.

The decline in the profit margin of manufacturing industries is particularly striking when it is expressed as a percentage of sales. It dropped from 4.9 percent in 1948 to 3.1 percent in 1956. (By way of comparison, the figure for 1929 was 6.4 percent; for 1937, 4.7 percent; for 1940, 5.5 percent.) Thus, concludes the NAM study, “between 1948 and 1956 profit margins as a percent of sales have fallen from a level characteristic of prosperity years to a level characteristic of recession years.” Higher costs cannot automatically be recouped by higher market prices.

WAGES AND OUTPUT

These statistical comparisons by the National City Bank and the NAM prove that the current inflation is at least not the result of the “greed” of manufacturers for exorbitant profits, as Reuther contends. But they do not prove that “the conclusion is inescapable, “as the NAM study puts it “that the current inflationary push is due to the rising costs of labor and the continuing heavy tax burden.”

The rise in wages, it is true, as both studies point out, has exceeded the rise in “productivity.” But the studies compare money wages to physical output. In any inflation, no matter how caused, money wages are practically certain to rise more than physical productivity. This is simply because both wages and prices rise in every inflation. It does not necessarily follow that the rise in prices has been caused by the rise in wages. Both may have risen from a common cause.

That common cause is not hard to find. Neither the wage rise nor the price rise since 1939 or 1948 would have been possible if it had not been fed by an increased money supply. The money-and-credit supply increased from $64.7 billion at the end of 1939, to $172.7 billion at the end of 1948, to $226.4 billion at the end of 1956. There would have been no inflation, in short, in the last eight or eighteen years without the cooperation and connivance of the monetary authorities.

This does not mean, of course, that union pressure has had no responsibility for the result. Under present labor laws the government has not merely encouraged but in effect forced the creation of industrywide unions with power to impose continuous wage increases. Unless these excessive union powers are reduced they must either lead to unemployment by forcing costs above prices, or create political pressure for still more monetary inflation.