Unions, Inflation and 'Non-Goods'
DECICCO, ERNEST M.
Rising cost of services, not manufactures, ups price level Unions, Inflation and 'Non-Goods' By Ernest M. DeCicco Recent rises in the cost-of-living index again focus attention on wage gains by...
...Should Walter Reuther accept a 10-per-cent wage cut at Ford if the company said the total cost of producing a car would decline by about 1.6 per cent (labor cost is 16 per cent) ? The theory is that the wage cut would lead to a price reduction—less than $50 on a $3,000 automobile—and hence an increase in new-car sales and maintenance of full employment at the plant...
...Between 1945 arid 1948, a period of rapid inflation, profits before taxes for 20 major steel companies advanced from $270 million to $884 million, a gain of 226 per cent...
...If the prices of retail manufactured goods remained relatively stable (and these are the goods produced by union labor), how does one account for the inflation...
...A record-breaking wage increase of 25 per cent would raise total cost by 25 cents and the product would be repriced at about $5.25...
...To begin with, a 15-per-cent wage raise does not necessarily mean a 15-per-cent raise in the unit labor cost, as is sometimes assumed...
...This is the area that is heavily unionized...
...30 — 2 22 —20 Motor Vehicles...
...Governmental attempts to raise farm income achieved some measure of success by 1956, and the price of food rose...
...Competition has shifted to the battlefronts of advertising, product promotion, customer services and a host of other activities unrelated to price...
...Hundreds upon hundreds of union contracts are signed each year by a wide group of autonomous unions in a large number of distinct geographical areas, different industries, and varied time settings...
...The service trades have expanded dramatically over the same period...
...Durable commodities also rose slightly in price in 1956, though the gain appears to be mainly due to higher new-car quotations...
...In the two industries in which labor cost did go up (chemicals and motors), the gains were nominal in comparison to the wage gains...
...Building construction occupies only 5 per cent of the workers, even though the U.S...
...27 —18 42 —23 Iron and Steel...
...2. Unit labor cost is an important part of the total cost of production...
...but the prices of household appliances utilizing large quantities of steel (such as washing machines) actually declined by an average of 13 per cent...
...And productivity, in turn, depends in the long run on such factors as technology, plant organization and human efficiency, and in the short run on fluctuations in the utilization of capacity by the plant...
...In addition, the BLS index does not include the prices paid for hotel rooms, vacation trips or a college education...
...In the last two years shown, when wage rates remained unchanged, labor cost went down by 15 per cent in the first year and up by 3 per cent in the second year...
...Wage increases over the same period barely kept pace with the cost-of-living index—a gain of less than 35 per cent...
...Carried to its logical extreme, this means that the lower the wage, the greater the number employed—because academic theorists have proved that the lower the price of anything, the more of it will be bought, and that is also true of labor...
...Mortgage interest zoomed up by 30 per cent...
...For the general cost-of-living index is up—18.7 per cent higher than the 1947-49 average...
...there was virtually no rise at all in the whole range of clothing and apparel...
...A Chinese coolie may be paid an extremely low wage, vet the unit labor cost may be relatively quite high: that is because he has so little machinery, land and other resources to use that his output is low...
...There has been no technological improvement in the barber shop, for example, since the invention of the clippers...
...The steel industry, however, proceeded to announce a price increase of $8.50 a ton...
...The policy of live-and-let-live without price competition was tacitly consummated, and for many years competition has been restricted to Madison Avenue channels...
...38 —32 Cigarettes...
...According to this theory, an impulse at one end of the chain, such as a wage increase, will be reliably transmitted through each link...
...the eventual result is inflation...
...In other words, there would have to be a tight chain between wage rates and labor cost, labor cost and total cost, total cost and price, price and sales and hence the volume of employment...
...This category covers a wide variety of items: rents and prices for homes...
...Does all this mean that inexorable upward pressure on wages by unions must bring inflation...
...The villain of the piece is the "big union" which has "monopolistic power" to raise wages...
...The London Economist has observed that the United States manufactures more than any other nation, but is not a manufacturing country...
...as the nation grows wealthier, increased consumption more and more takes the form of increased services—so-called "non-goods...
...Rising cost of services, not manufactures, ups price level Unions, Inflation and 'Non-Goods' By Ernest M. DeCicco Recent rises in the cost-of-living index again focus attention on wage gains by union labor...
...In 1939-40, average hourly earnings went up by 5 per cent while unit labor cost went down by 8 per cent...
...in a future issue, Mr...
...The price of steel could have been raised from $100 to $102 a ton as an offset...
...3. Total production cost not only affects but determines the price charged to the consumer...
...According to the Federal Trade Commission, labor cost was less than 15 per cent of the sales dollar in 27 industries, between 15 and 20 per cent in 25 industries, and more than 25 per cent in 21 industries...
...Since only one out of ten workers is to be found in agriculture, the nation is not primarily agricultural either, even though it exports large amounts of farm products...
...To sum up, the early years of the Eisenhower Administration were characterized by relative price stability because, although the prices of service items were rising rapidly, the prices of food and of durable manufactured goods were both declining...
...Since labor cost is approximately 20 per cent of total cost in an efficient mill, the increase in total cost should not have exceeded 2 per cent...
...4. The price affects the number of units that can be sold—and, thus, the amount of labor needed to produce them...
...Not at all, according to the figures on some highly unionized industries: INDUSTRY % CHANGE, 1929-1940 IN Avge Hourly Earnings Unit Labor Cost Agricultural Implements . , . 24 —23 23 —11 Chemicals...
...The Jesse James theory rests on the idea that unions set off the so-called wage-cost-price spiral...
...In, manufacturing, furthermore, labor cost is usually a small percentage of, total cost...
...Indeed, the BLS figures show that most of the inflation results from price rises in the category of "services and shelter...
...radio-TV repairs by 25 per cent...
...This is true of gasoline, cigarettes and alcoholic beverages.} Over the four-year period, prices rose very slightly on such items as automobiles, toilet articles and newspapers...
...According to the Jesse James theory, the union leader is supposed to predict how much less of the product will be sold at the higher price and consequently how many workers will be fired...
...Aggregate figures will illustrate the major change in the labor force that has been taking place in the last decade...
...Tremendous productivity gains made this possible...
...It is hard to raise the productivity of a teacher, fireman or policeman, and their numbers rise with our growing population...
...50 —25 48 —61 Tires and Tubes...
...In fact, though businessmen are fond of relating the pricing process to total cost and the necessity for meeting competition, the American economy today is characterized by little price competition...
...Is the union leader who gets higher pay for his members a Robin Hood or a Jesse James...
...Many factors besides wages affect productivity and hence labor cost...
...since "big unions" are associated with big corporations, their wage gains are followed by price increases and higher living costs for the consumer...
...With regard to this one, it may be more accurate to say that the unions are acting as thermometers, recording the heat, not as the fuel sustaining it...
...Many products bear a customary price (a nickel for a coke), and such prices change only infrequently...
...In manufacturing, output has increased by almost 50 per cent since 1947, but the number of workers went up by only 3 per cent...
...The next year, Plymouth managers cut prices...
...A few figures from two vital industries will show how casual is the presumed link between wage rates and labor cost per unit: IRON & STEEL RAYON % CHANGE IN % CHANGE IN Years Avge Hourly Earnings Unit Labor Cost Avge Hourly Earnings Unit Labor Cost 1929-30 3 9 5 — 9 1930-31 —10 — 6 14 —29 1931-32 — 3 — 8 —14 —17 1932-33 — 3 —10 7 —20 1933-34 19 20 22 18 1934-35 2 — 4 3 6 1935-36 — 1 — 4 1 — 6 1936-37 , , , 21 19 15 6 1937-38 2 0 5 — 6 1938-39 . . 0 —15 2 —10 1939-40 0 3 5 — 8 Not once between 1929 and 1940 did average hourly earnings and unit labor cost in iron and steel move together by the same magnitude...
...Food is hardl> a factor: The BLS index for food was 112.(> in February 1952 and only 113.6 in February 1957...
...In fact, it is easy to suspect that certain firms use wage raises as an excuse to exploit consumer markets...
...on aggregate national consumer spending...
...Virtually the whole list has experienced steady price inflation since 1950...
...Readers will recall his article on "right-to-work" laws in our April 15 issue...
...41 6 Cotton Goods...
...Only such self-employed categories as lawyers, doctors and shopkeepers, plus workers in public transportation, failed to expand their ranks...
...Every inflation has its own historical pattern...
...28 — 2 Woolen and Worsted . . . 22 —11 From 1929 to 1940, average hourly earnings rose in all these industries, while unit labor cost fell in 12 of the 14 groups...
...Back in the Thirties the manager of the Plymouth Division told a Congressional hearing that one year Plymouth prices were raised...
...Approximately the same kind of information is available for other industries...
...Home-owner costs, utilities and housing, taken together, climbed around 9 per cent...
...this time Ford followed suit, and only the consumer benefited...
...The number of bank-tellers, stock brokers, insurance salesmen and others employed in finance rose by 38 per cent...
...We have seen that wage rates in unionized manufacturing industries have increased substantially over the years, but man-hour productivity rose even faster—with the result that labor cost declined...
...Little productivity improvement appears likely in these areas...
...Schnabel will discuss the effect of business profits...
...8 —20 Petroleum Refining...
...On the other hand, prices declined for used cars, television and radio sets, all types of appliances, toys and sporting goods...
...Increased expenditures on government services also bring few productivity gains...
...Meanwhile, in the service workers' attempt to match the income of unionized factory workers, the price of the service rises...
...Nevertheless, when all three of these components—food, durable manufactured goods, and services—move in the same direction at about the same time, the cost of living quickly reflects it, to the general consternation...
...For nine of these companies publishing ingot production data, profits rose from $3.61 per ingot ton to $10.44, a gain of 190 per cent...
...One must seek the causes of the inflation elsewhere...
...Despite increased profits as well as higher money wages, prices of retail manufactured goods are, on the average, no higher today than they were in 1952, according to the Bureau of Labor Statistics...
...Industry-wide bargaining and nation-wide bargaining are both rather limited, and when newspaper editorialists assert that a wage raise in the tire industry will raise tire prices and the tire worker will be no better off than before, they forget that he doesn't only buy tires...
...Wage raises gained by unions do not always lead to inflation, and union workers often have a hard enough time just keeping up with the rising price level...
...rail, bus and rapid-transit fares and movie admissions rose 20 per cent...
...From 1958 to February 1957, rent rose by about 15 per cent along with an equivalent rise for doctors' fees...
...From 1951 to 1955 the price of steel rose by 14 per cent...
...Only one-fourth of the total labor force works in factory manufacturing...
...Most of the revenue is derived from advertisers, not newsstand sales, and both prices and ad rates are based on circulation and type of readership rather than production costs...
...Under this doctrine, "the best wages are not the highest wages, but the wages that lead to full employment...
...The majority of the American labor force today is engaged in services or in distribution or transportation trades...
...for eight of the years, hourly earnings and labor cost moved in opposite directions...
...In other words, if labor cost is 20 per cent of the sales dollar and an article is priced at $5, total labor cost for the unit is $1...
...While such prices did rise somewhat in 1956, as a whole they fell from 1952 to 1955...
...All of which presents a far more complicated picture of the inflation than that painted by adherents of the Jesse James theory...
...While the coercive force of comparison may tend to make the final contracts in such industries as steel and oil quite similar, no given union leader is really free to consider the impact of his wage bargaining On May 6, we published "Labor and Inflation," by Oscar Schnabel, which examined union bargaining demands in terms of their effect on the national economy...
...A fundamental cause of the present inflation is the fact that, throughout these service and distribution trades, gains in man-hour productivity are relatively minimal...
...Last year, the steel industry granted a wage package of about 10 per cent...
...The theory presumes a tight relationship between four major connecting links: 1. The wage rate affects the labor cost per unit of the product...
...In rayon, hourly earnings climbed by 48 per cent from 1929 to 1940 and labor cost fell by 61 per cent...
...In the United States, unlike Europe, wage bargaining is fractionalized...
...auto mechanics, laundry workers, barbers, and a multitude of others in various services increased by 26 per cent...
...retail shop clerks and others employed in trade rose by 21 per cent...
...But, generally, labor cost per unit depends as much on productivity per man-hour as on hourly wage scales...
...Unit labor cost as a percentage of value of product (a close approximation to total cost) varies from about 5 per cent in tobacco manufacturing to 16 per cent in automobiles and 20 per cent in iron and steel...
...Actually, no major auto company has tried to compete by lowering prices in a generation...
...I N and radio repair, auto insurance, mortgage interest, auto repair, medical and dental care, train and bus fares, gas and electricity, telephone, subway fares, etc...
...In rayon, the association was even less consistent...
...Personal care went up about 10 per cent...
...Yet even where cost and price are more directly related, the so-called "responsibility" of the union leader toward the price pattern is unclear...
...Federal, state and local government employees were up 31 per cent, domestic servants 40 per cent...
...when Ford did not follow the lead, Plymouth lost sales to Ford...
...The productivity gains in synthetic fibers were obviously of tremendous magnitude...
...builds more than any other nation...
...What are the facts...
...For a union leader to consider the effects on employment in his own industry of any wage bargain he might conclude, those effects would have to be predictable and definite...
...The facts are that these links are quite loose at every stage...
...Increased leisure in recent years has added to the importance of these items, and everyone knows how these prices have gone up...
...Are union-negotiated pay increases a major cause of inflation—or just another response to it...
...In the few cases where retail prices have risen since President Eisenhower took office, the rise mainly reflects increased Federal, state and local taxes...
...In the newspaper industry, for example, production cost has practically nothing to do with price...
...Here we present another approach to the inflation by Ernest DeCicco of the economics department at Loyola University (Chicago...
...In these important and highly unionized industries, man-hour productivity gains have been sufficient to overcome any wage advantages gained by the union...
...33 11 Newspapers...
...Cumulatively speaking, from 1929 to 1940, average hourly earnings in the iron and steel industry rose by 30 per cent while labor cost per unit of steel produced fell by 2 per cent...
...In the service trades, on the other hand, productivity gains are next to impossible...
...which accounts for more than a third of the consumer dollar...
...There may be a fairly close connection between wage rates and unit labor costs in industries where a great deal of hand labor is used (such as hand-carved wooden pipes) or where piece-rates are paid (such as textiles...
Vol. 40 • May 1957 • No. 21
