Should wage rate increases be limited by the rate of increase in productivity; if so, how?

Equally important, there is no agreement on the ingredients of a desirable wage-price policy. This Committee has heard testimony that the wage guideposts should not always tie wage rate increases to the rate of increase in productivity because the increasing productivity of capital may require, for a while, that wage earner gains exceed productivity gains in order to restore economic equilibrium. It has also heard the wage guideposts criticized because, allegedly, they reinforce the myth in the public mind "that everyone is entitled to some average productivity increase in wages annually." "

Among those who accept the principle that wage rate increases should be tied to productivity rate increases, there is disagreement as to whether the standard should be the nation-wide trend rate of productivity-increase or the rate of productivity-increase in the particular industry in question." There is also disagreement as to how the trend rate of productivity increase, on the one hand,* and employee compensation per man-hour, on the other," should be measured. These may be issues which, eventually, technical experts should be able to resolve to everyone's satisfaction. But the guidepost policy also raises questions as to what is a "fair" wage and a "fair" profit and an "equitable" distribution of the national income on which opinions and interests will remain in sharp conflict.

Should increases in real, not money, wages be used for guidepost comparisons?

The conflicts of interest become apparent when we turn to the question whether wage rate increases should be limited by the trend rate of productivity growth even in the face of significant increases in the cost of living. The guideposts assumed that real wages would go up as productivity increased. But this has not happened because price stability has not been maintained. Under these circumstances I agree with Mr. Gerhard Colm that it is not realistic or equitable to expect a "union whose contract is under consideration . . . to pay the penalty for the failure of government, business and other unions to do their part in the stabilization effort." " Therefore we should not blame such a union for seeking to improve its position.

Whether particular unions will exercise restraint in this struggle and be satisfied with only a "partial and gradual adjustment” for cost of living increases " as Mr. Colm recommends-may depend upon whether labor is convinced that the stabilization program is being applied "equitably to all groups in the popula tion." 32 But obviously there is no agreement in the country on what the principle of equality of sacrifice now requires because there is no agreement on what is an "equitable" distribution of income.

Bargaining about distribution of income

When it erected the original guideposts in 1962, the Council of Economic Advisers recognized that, if adhered to, they would perpetuate the existing "relative

Hearings on 1963 Economic Report of the President Before Joint Economic Committee, 88th Cong., 1st Sess. 727 (1963); Hearings on 1965 Economic Report of the President Before Joint Economic Committee, 89th Cong., 1st Sess., pt. 4, at 27 (testimony of Mr. Leon Keyserling).

Hearings on 1964 Economic Report of the President Before Joint Economic Committee. 88th Cong., 2d Sess. 219 (1964) (testimony of Professor Walter D. Fackler).

See 1950 Annual Economic Review of Council of Economic Advisers, at 101: Hearings on H.R. 11916 Before a Subcommittee of the House Committee on Government Operations, 89th Cong., 2d Sess. 82-83 (statement of Chairman Ackley); Joint Economic Committee, Report on Jan. 1964 Economic Report of the President. S. Rep. No. 931, 88th Cong., 2d Sess. 38 (1964) (minority views); Hearings on 1964 Economic Report of the President Before Joint Economic Committee. 88th Cong., 2d Sess.. pt. 2, at 158 (testimony of Mr. W. A. Boyle, President of United Mine Workers); N.Y. Times, Aug. 9, 1966, p. 1, col. 8 (views of Secretary of Commerce John T. Connor).

28 See for example, Hearings on 1966 Economic Report of the President Before Joint Economic Committee, 89th Cong., 2d Sess. 398 (1966) (testimony of Mr. Walter Reuther); id. at 617-618 (testimony of Mr. Leon Keyserling): Joint Economic Committee, Report on Jan. 1964 Economic Report of the President, S. Rep. No. 931, 88th Cong., 2d Sess. 38 (1964) (minority views).

See for example, Hearings on 1965 Economic Report of the President Before Joint Economic Committee, 89th Cong., 1st Sess., pt. 3, at 102 (1965) (testimony of Mr. Leon Keyserling); Hearings on 1966 Economic Report of the President Before Joint Economic Committee, 89th Cong., 2d Sess. 444 (1966) (testimony of Mr. Elisha Gray II).

30 Hearings on H.R. 11916 Before a Subcommittee of the House Committee on Govern ment Operations, 89th Cong., 2d Sess. 7, 8 (1966) (statement of Mr. Colm).

31 Id. at 8.

32 See statement of AFL-CIO Executive Council, The American Federationist, Sept. 1966, p. 8.

75-314-67-pt. 4- -15

9 33

shares of labor and nonlabor incomes in total output.' So it emphasized that "there is nothing immutable in fact or in justice about the distribution of the total product between labor and nonlabor incomes." 34 It thought it desirable that labor and management "should bargain explicitly about the distribution of income of particular firms or industries", so long as they did so within the framework of a stable price level. However, if such bargaining resulted in price increases, the Council pointed out labor and management would not be redistributing income within the industry involved; they would be redistributing income "between that industry and other segments of the economy through the mechanism of inflation."

936

35

The Council affirmed this position in 1964, stressing that price behavior in an industry in which such bargaining was going on must remain consistent with the general price guidepost. This guidepost, as we know, requires that in an industry "whose trend productivity is growing more rapidly than the national average, product prices should be lowered enough to distribute to the industry's customers the labor-cost savings it would make under the general wage guidepost."" In effect, the Council was saying that bargaining about the distribution of income in such an industry should take place only after prices are reduced to the extent indicated. Labor might then receive a larger share of the industry's income if it won greater wage increases than the productivity standard permitted or a larger share might go to profits if the workers were granted smaller wage increases than the productivity standard permitted.

359

But the Council has vacillated on the desirability of bargaining about the distribution of income. In 1965 it felt constrained to warn that experience during the 1950's demonstrated that such bargaining "proved self-defeating", that neither labor nor capital "gained, and both lost through higher prices, weaker markets, reduced profits, and lower employment." In 1966, apparently, it felt that it had gone too far in advising labor not to bargain collectively for a change in the distribution of income. So it retreated to the position that "public policy is and should remain neutral with respect to wage and price decisions that attempt to change the distribution of industry's income between labor and capital" so long as such decisions do not produce inflationary pressures. This year, however, the Council repeats its warning "that attempts on the part of unions to redistribute income from profits to wages through excessive wage increases in high-profit industries results primarily in higher prices in those industries" and in the redistribution of "real income from the rest of the community-who are mostly other wage earners to the workers in question, with very little redistribution from profits to wages." 40

39

But of course this is true only because management in high-profit industries has been unwilling to reduce prices and no means have been found to require it to do so. Recognizing that it is unfair to ask workers to restrain their wage demands if their restraint will only result in higher profits, the Council appeals for forbearance on the part of management. It asks producers to “absorb cost increases to the maximum extent feasible, and take advantage of every opportunity to lower prices." *1 For the first time, too, the Council states that profit margins appropriate for the boom stage of a boom and bust economy-to which it likens 1966 average profit margins of manufacturers which were higher, as a percentage of equity, than in any prior year since the highly inflationary year of 1950-are too high for a steadily expanding economy." Indeed, the Council maintains that lower profit margins may be essential to maintain a steadily expanding economy."

42

But there is no agreement in the country on any standard of "reasonable” profits that would tell us to what extent producers should absorb cost increases and how much lower profit margins should be. For this reason, we cannot tell whether a wage increase higher than that permitted by the wage guideposts should have the effect of redistributing the industry's income or should justify a price increase or a smaller price decrease than the guideposts would call for.

33 1962 Annual Report of Council of Economic Advisers, at 186. 34 Ibid.

35 Id. at 188.

36 Ibid.

37 1964 Annual Report of Council of Economic Advisers, at 119. 38 1965 Annual Report of Council of Economic Advisers, at 109. 391966 Annual Report of Council of Economic Advisers, at 91. 40 1967 Annual Report of Council of Economic Advisers, at 132. 41 Id. at 133.

42 Ibid.

43 Ibid.

Under these circumstances little is gained by asking management to adopt a principle of profit minimization or even to blame it for trying to maximize profits. Yet the fact remains that unless agreement is reached on some standard of "reasonable" profits to guide price policy in the administered-price industries, organized labor cannot reasonably be expected to acquiesce in absorbing any part of the cost of living increases due to the rise in prices in other sectors of the economy-in farm products and services, for example. Nor can it be expected to heed the Council's advice that it pay for the higher minimum wage by accepting lower wage increases than the average permitted by the productivity standard."

A proposal for congressional formulation of a wage-price policy

I shall not try to suggest answers to the many questions I have raised. The point I wish to make is that the issues raised by the guideposts-or any wageprice policy-are the kind that are resolved in our democracy only by an accommodation of conflicting claims which all concerned find tolerable. To each such an accommodation, labor and management must be given the opportunity to participate in the formulation of a wage and price policy. Furthermore, since any bargain that these groups may strike will affect the life of the ordinary citizen more than much legislation passed by Congress, Congress must be the final arbiter.

Accordingly, I urge this Committee to institute hearings immediately to determine what our wage-price policy should be in the period ahead. Representatives of labor, management, the public-and of course the Administration-should be heard. This Committee should then write a report which would enable the ap propriate legislative committees of Congress, if they approved it, to draft a bill setting forth the components of an overall wage-price policy.

It has been objected that it is unwise to legislate a wage-price policy because that will give it "legal status and a flavour of compulsion" and destroy its voluntary character." But if it is agreed that representatives of labor, management and the public should participate in formulating a wage-price policy, some way must be provided for settling controversies that may arise. Only the President or Congress can do so; I think Congress should do so but that it should act in a manner that will require it to run the gauntlet of a possible Presidential veto. Furthermore, I do not see why congressional formulation of a wage-price policy, by itself, will destroy the voluntary nature of labor-management compliance with the policy.

Translating the overall wage-price policy into specific policies for particular industries

Flexibility was the key to the 1962 formulation of the guideposts. In addition to the factors making for flexibility which I have already mentioned, the 1962 formulation recognized exceptions in the interests of "efficiency and equity." Exceptions from the general wage guidepost were envisaged for an industry which was unable to attract sufficient labor and for one which was unable to provide jobs for its entire labor force; and for industries in which wage rates were either exceptionally low or exceptionally high compared with those earned elsewhere by similar labor." Similarly, exceptions from the general price guidepost were expected in industries in which the level of profits was insufficient to attract the capital required to finance a needed expansion in capacity or in which the relation of productive capacity to full employment demand showed the desirability of an outflow of capital; in industries in which costs other than labor costs had either risen or fallen; and in which excessive market power had resulted in rates of profit substantially higher than these earned elsewhere on investments of comparable risk."

In 1964, for the first time, the Council announced that the general guideposts could "cover the vast majority of the wage and price decisions" and that the exceptions recognized in 1962 were "intended to apply to only a relatively few cases." 49 The Council affirms this position in its 1967 report. While it con

44 Id. at 130.

45 Hearings on H.R. 11916 Before a Subcommittee of the House Committee on Government Operations, 89th Cong., 2d Sess, 91 (1966) (statement of Chairman Ackley objecting to the Reuss bill which would not go as far as the suggestion made above). 46 1962 Annual Report of Council of Economic Advisers, at 188.

47 Id. at 189.

48 Ibid.

49 1964 Annual Report of Council of Economic Advisers, at 119.

tinues to recognize exceptions from the general wage guidepost "that serve an economic function by assisting in the reallocation of labor toward shortage occupations and industries," it points out that "the remaining labor shortages this year will be concentrated in unorganized professional and technical occupations.' The Council also seeks to confine the "comparable wages" exception from the general wage guidepost.1

But the Council's continuing attempt to prevent the flexibility that must be part of any wage-price policy from becoming the means to defeat the policy itself is negated this year by the practicalities of the situation the Council faces. It does not believe that any firm rules will or can be applied for the movement of either wages or prices in 1967.

In fact, no overall wage-price policy formulated by the President or Congress can be expected to set forth clear guides to action in every case. The more general and more flexible the statement of such a policy, the more difficult it will be to apply it to any particular industry or firm and therefore the more difficult it will be to judge whether a particular wage or price decision is in accord with the policy.

A proposal for administrative implementation of the overall policy adopted by Congress

To tailor the overall wage-price policy adopted by Congress to the circumstances and needs of particular industries and firms is an administrative task. In my opinion, this function should not be assumed by Congress, the Joint Economic Committee or the Council of Economic Advisers. It should be given to an administrative agency. However, a tripartite committee-representing labor, management and the consuming public-should be appointed by the President for each industry to advise the agency in the formulation of a specific wage-price policy for that industry. It is important that such advisory committees be set up as quickly as possible in those industries in which wage agreements will be newly negotiated in 1967. In addition, the agency should be required to hold public hearings on the wage-price policies proposed for particular industries and to issue written statements justifying the policies adopted for each industry. In time, this agency should have valuable advice to offer to all concerned with the formulation of the overall wage-price policy, which should be under constant review by the Congress.

Determining whether a particular price or wage decision accords with the wageprice policies adopted for the industry

If there is to be voluntary compliance with the wage-price policies thus formulated for an industry-and if the force of public opinion is to be brought to bear to help secure compliance-then labor, management and the public must be able to know whether a particular wage or price decision accords with the policies laid down. The administration of the guidepost policy to date has not assured the availability of such knowledge. Indeed, the Coucil of Economic Advisers admits that when it meets privately with producers about price increases, "it ordinarily does not have the detailed information which would permit a clear judgment as to the appropriateness of the proposed price change on either the basis of the guide post standards or other relevant considerations." 5 Nor has such detailed information been made available even in those cases in which the Council has issued formal statements to the public commenting on particular wage or price decisions. Yet in many cases, labor and industry spokesmen have challenged the Council's application of the guideposts to their situations. For example, the steel industry in 1962 and 1966, the aluminum industry in 1966 and the machinists in the airline industry in 1966 challenged Council conclusions.

A proposal for hearings to determine propriety of particular wage or price decisions

To determine whether a particular wage or price decision accords with the stabilization policies laid down is a task that must be performed by an impartial, respected public body. It requires a judicious approach which should include a full and fair hearing for the interested parties, including public representatives.

50 1967 Annual Report of Council of Economic Advisers, at 130.

51 Id. at 130-131.

62 Id. at 126.

I do not think the Council of Economic Advisers should be asked to perform this function of hearing and judging. Nor, with all due respect, do I think that this excellent Committee is the appropriate body to do the job. This task is likely to be accomplished more expertly and fairly outside the halls of Congress. I would recommend, therefore, that it be given to the agency charged with formulating the industry-wide policies. This agency will thereby gain experience with particular situations which will help it in formulating these policies. In turn, its experience in elaborating these policies will help it to judge specific cases. Advance notice of proposed wage and price actions

Furthermore, because it is always difficult to secure the rescission of action that has been taken, Congress should require labor and management to give this agency advance notice of any proposed wage or price increase. This requirement will apply, it should be recalled, only to those industries in which labor and management have a substantial measure of discretion in setting wages or prices. The agency should then be relied upon to institute hearings in those cases in which it thinks that a proposed wage or price increase may threaten national economic stability. After hearing, the agency should be required to publish its findings and recommendations in the case.

The Council of Economic Advisers reports that "the greatest failure of observance of the price guidepost lies in the failure to reduce prices on a considerable number of the product lines of a large number of industries." 53 For this reason, it is important to authorize the agency to initiate hearings in those cases in which it thinks price decreases are called for by the stabilization policies and the failure to make them threatens national economic stability.

Securing compliance with wage-price policics

The government's past interventions to secure compliance with the guideposts raise serious questions of propriety. Too often, they have become public tests of strength between the President of the United States and the executives of a great industry or a great labor union. "In any such confrontation with the President." Alcoa's President Harper has said, “there can and should be only one outcome." " Precisely here is the difficulty. In such a test of strength, the President must not lose. But this necessity itself creates the danger that the outcome may be arbitrary.

Furthermore, whenever, in order to have his way, the President must resort to means other than persuasion-such as selling stockpiled materials, awarding contracts to producers who have not raised their prices, instituting tax or antitrust investigations-he will subject himself, inevitably, to criticism for allegedly abusing his authority.

Equally troublesome, there can be no certainly in this situation that the President will deal even-handedly with all those who are similarly situated. Not only is the fairness of this system of enforcement in question, but the haphazard quality of president intervention also makes it an ineffective way to enforce stabilization policies. Finally, in time, labor and management will appreciate that even the powers of the President are limited and begin to flout the President's policies with impunity. I am afraid that the President's 1967 Economic Report reflects his estimate that this time has already come.

The suggestions that I have put before this Committee may make it possible to carry out the overall wage-price policy adopted by Congress effectively and equitable without the personal intervention of the President.

At this time, I do not suggest that Congress should impose any sanctions for non-compliance with the wage-price policies that will be elaborated under the authority of the legislation I have outlined. I would hope and I expect that Congressional adoption of a wage-price policy, subsequent administrative implementation of the policy on an industry-by-industry basis and public hearings to determine whether particular wage-price decisions accord with the policies formulated-will maximize the possibility of securing the voluntary cooperation of labor and management and, if necessary, of mobilizing public opinion to induce such compliance.

I would not object, however, if Congress decides to impose some sanctions; if, for example, it specifically authorizes and directs the President to manage the

53 Id. at 125.

Harper, A Businessman's View of Guideposts, in Committee for Economic Development, Managing a Full Employment Economy 39 (1966).