Steel Strikes as Lockouts
O'Connor, James
No one has argued the omnipresence of the law of supply and demand more persuasively than businessmen themselves—spokesmen for the steel industry not excluded. It is therefore ironic that...
...Then "stockpile" steel was demanded at the rate of .6 million tons weekly (2.6 minus 2.0) over a period of approximately two months...
...At present, with the old cartel solutions ruled out by the anti-trust laws, the answer is to remain unmoved when confronted with union demands (recall that last summer the industry refused to budge an inch on the wage issue, even though the union proposals were relatively moderate) and provoke a strike that will serve as a lockout...
...Like most goods and services, substitutes are available for steel in many of its uses...
...Steel has now found a new way, with steel workers and consumers the victims of the industry's intransigence...
...This solution has the extra advantage of relieving the industry of the burden of paying out Supplementary Unemployment Insurance Benefits to large numbers of workers...
...AT THIS POINT the facts need looking into...
...If the demand for steel shared the characteristics of, say, that for cigarettes, steel sales would fall off immediately as consumers adjust their purchases to the new price...
...In my view, the industry— having resolved the inequality between demand and capacity—will have begun genuine negotiations on the wage issue, with a settlement acceptable to the union as the probable outcome...
...Whatever the outcome, it is clear that both problems will arise again...
...Perhaps the industry would have preferred to wait a few more months, but the expiration of the union contract offered an opportunity too good to be passed up...
...Thus, while they would like to reduce their purchases of steel at the higher price, they are unable to do so in the shortrun, and must buy—until their own contractual obligations have been fulfilled— the same quantity of steel at the new price which they had been just willing to buy at the old...
...There is not, it is true, one seller of steel, but many in the industry...
...Second is the obvious but seldom remembered fact that the higher the price, the smaller will be the demand for any commodity...
...December...
...The steel industry, meanwhile, enjoys artificially large sales at the going price, and with them, artificially high profits...
...But why did the industry want a lockout...
...The impact of the cyclical upswing, however, temporarily restimulated demand, and, with the help of some stockpiling (why was everyone so sure of a strike months ahead of time...
...output rose to an average of 2.6 million tons weekly from April to midJune...
...Thus the pressure of cyclical demand was not as intense as it was during the first six months of 1959...
...However, unlike buyers of Brand A cigarettes who can promptly take their business to Brand B, purchasers of steel have made commitments to their customers which have to be met...
...Yet the strike lasted a full two months before steel users began to feel any pinch...
...his immediate response—given that the cost-demand nexus which maximizes profits has been altered—is to raise prices...
...It is therefore ironic that steel succeeded last summer in accomplishing what had been denied as a possibility: The law of supply and demand— through the use of the strike as lockout—was temporarily repealed...
...This was the adjustment that the steel industry required...
...Suppose now that the price leader has found a price and level of output which maximizes profits...
...How—if at all—the issue of "managerial prerogatives" will be resolved, it is difficult to say...
...An adjustment was definitely in order...
...total, about 5.4 million tons, or less than three weeks normal supply...
...In the middle of a boom period—when it could be expected to continue its rise —output, which had been about 2.4 million tons per week, fell slowly, with one or two brief interruptions, to about 2.25 million tons in the mid( lie of June, 1956...
...Inevitably, given the almost pathological fear on the part of steel of lowering prices, it is the latter course which is the more attractive...
...Steel) on whom the other firms depend for their pricing policies...
...it has been merely a question of method...
...Two crucial facts confront the price leader...
...THE STEEL INDUSTRY, for purposes of analysis, can be treated as a monopoly...
...recall that the upswing from the last recession began only in late 1958...
...but it needs supplementing...
...Again a substantial increase in steel prices one year before the strike...
...This is the question that so far has not been raised, except by inference...
...Steel output, however, continued to rise until the beginning of 1956 (steel purchasers were fulfilling their contractual obligations...
...Even a month later, there was nothing that could be called a serious shortage...
...By the time this reaches print, the Taft-Hartley injunction will have expired...
...at year's end, profits as a percentage of sales were 7.9°%a, highest since the war year of 1951...
...With an eye to the enormous profit margins in steel, not a few observers have implied that what we witnessed was indeed a lockout...
...Steel could well have afforded to grant immediately a substantial wage increase, they argued, on the basis of productivity gains, as well as current profits...
...Then what would ordinarily be interpreted as a rather strange development occurred...
...in the use of the strike as lockout they are intolerable...
...First, the 1956 strike: Back in July, 1955, the Federal Reserve index of steel prices, following a year of relative stability, took a jump of five and a half per cent...
...Again output continued to rise for a time, until October, 1958, when it leveled off—again in the face of a big cyclical push—remaining steady until January, 1959...
...While early 1956 was a boom period, we had come out of the previous recession in late 1954 and 1955...
...Shortly after, the strike began, surprising no one...
...The "price followers" will enjoy relatively more or less profits on the basis of this price, depending upon their own unit costs...
...The industry's refusal to bargain realistically implied that it would just as soon close shop for a few months...
...No one has argued the omnipresence of the law of supply and demand more persuasively than businessmen themselves—spokesmen for the steel industry not excluded...
...On July 1, with the industry unmoved by union demands, a strike began which was to last thirtyfour days...
...One is the relationship between costs and demand, from which can be derived a price (and output) which will maximize total profits...
...and if prices are abnormally high, the demand for steel—unlike that for food, for example—can often (with time) be postponed altogether...
...The liberal view—that the strike was a showdown battle over the issue of work rules and other "managerial prerogatives" is partially true and certainly necessary for a full understanding of the strike...
...Suppose also that the leader's costs suddenly increase sharply...
...And that would be the end of the story...
...A more strictly economic interpretation, such as I will here suggest, has the value of revealing a sequence of events linking the recent strike with that of the summer of 1956...
...When will the Justice Department follow Congress's advice and take a close look at price leadership and administered prices in steel...
...We know that the social costs of monopoly power are substantial...
...In the heart of a boom the demand for steel had actually fallen off...
...Clearly, the demand for steel at the going (monopolistic) price was declining, despite the pressure of cyclical demand...
...The compromise reached with Kaiser Steel, calling for a joint labor-management committee to deal further with the problem of work rules, may turn out to be acceptable to both parties...
...Once steel purchasers have met their commitments—after a period of a few months—the demand for steel at the new price tends to decline acutely, forcing the price leader either to lower prices to stimulate demand anew or reduce the scale of operations (cut I0 back output...
...Regarding the first, the logic of monopoly has always implied output restrictions...
...To steel's reply that a wage increase would have been inflationary, they responded with the unanswered and unanswerable question: If you are so concerned about inflation, why not lower prices...
...The decision to reduce the level of production immediately poses a new question: How can it be done...
...yet there is a price leader (U.S...
...The events leading up to the current strike were, with one important modification, quite similar...
...Looked at from a different angle, the same conclusion emerges: Suppose that average weekly demand for steel at "normal" prices would have been 2.0 million tons (I bias this estimate downward for the sake of emphasis...
Vol. 7 • January 1960 • No. 1
