Read CHAPTER V - WAGES AND PRICE MOVEMENTS of The Settlement of Wage Disputes , free online book, by Herbert Feis, on

Section 1. The transactions of distribution arranged in terms of money. How does this affect the outcome of distribution as regards wages? Section 2. The characteristics of price movements. Section 3. The direct and indirect effects of upward price movements upon the distribution of the product. Section 4. The direct and indirect effects of falling price movements upon the distribution of the product. Section 5. The doctrine of the “vicious circle of wages and prices” examined. Its meaning and importance.

1. Up to this point the investigation of the forces which govern wage incomes has proceeded with only the most incidental acknowledgment of the fact that the whole series of processes which is described as production and distribution is performed with the aid of a monetary system. Production entails a constant comparison and calculation of money values. The transactions of distribution likewise. How does the intervention of a monetary system affect the outcome of distribution? How does it modify the share of the wage earners in the total product of industry? The subject of prices and price levels is one of the most difficult of economic subjects. However, our purposes do not require any inquiry into the general theory of the subject. It will suffice for us merely to recognize the existence of different types of price movements, without investigating except at particular points the conditions which govern them.

2. It is common practice to use the term “price level” to denote the position of prices of commodities in general. The price level is never anything more than the concept of a collection of prices of particular commodities. It is convenient to be able to express the position of this collection of prices by a single figure. To do this, use is made of various statistical devices by which this collection of prices can be combined into one price which will be statistically representative of the collection. That single figure is known as the Index Number of that collection of prices. Changes of the Index Number represent changes in the position of the collection of prices from which it has been statistically derived.

All price changes are changes in the prices of particular commodities. Of course, a change in the price of one commodity may produce a change in the prices of other commodities. Relatively small and occasional changes in a few, or even in a great many of the prices which make up the price level, have no importance for the problem of wages. Indeed, if the price level remained nearly stationary there would be no necessity of undertaking this investigation of the effects of price change upon the distribution of the product. However, large and protracted changes in the price level do occur, and these are genuinely important factors in the distributive outcome.

A study of the major price movements of the past makes clear the chief characteristics of these large and protracted changes in the price level. They are irregular changes. That is to say, all of the individual prices which make up the price level do not change at the same time, nor to the same extent. Certain prices may even change in opposite directions.

It is well to mark also, in passing, that the prices of some or many of those articles which occupy a very important place in all calculations of the cost of living of the wage earners the articles of food and clothing, and shelter may change in a different measure, or even in a different direction from the prices of the other commodities which compose the general price level. This possibility is the most genuine as regards food prices. Movements of food prices, and, indeed, of the prices of all agricultural products, are apt over short periods to be determined by weather conditions rather than by the industrial events which govern the general price movement. Mr. W. C. Mitchell in his book on business cycles studied the relation between the movements of retail food prices (the figures ordinarily used in cost of living investigations) and general business conditions during the 1890-1910 period in the United States. He writes in conclusion that “these figures (i.e., of 30 retail food prices) indicate a certain correspondence between retail prices and business conditions. In 1893, indeed, the thirty foods rose slightly instead of falling, but they declined during the dull years which followed the panic, and rose again when prosperity returned. The rise was slow until 1900-02; it became slow again in 1902-04; but rapid in 1905-07. The panic of 1907 came too late in the autumn to exercise much influence upon the average retail price level of that year. On the whole, this series reflects the course of business cycles better than might have been expected. For the supply of vegetables and animal foods varies in an arbitrary fashion determined by the weather, and the demand for staple foods is less affected by prosperity and depression than that for the more dispensable commodities." Even over periods of some duration there may be a marked difference between the movement of food prices and other prices.

3. Changes in the general level of prices must have prior causes, but they, themselves in turn cause economic disturbance. They give a tilt to the whole industrial system which manifests itself in the outcome of distribution. The effects upon the distribution of the product of an upward movement of prices are ordinarily different from those produced by a general decline in prices.

It is well to begin with the first case a period of a rise in the general price level. To give an accurate analysis of the successive interactions by which an upward movement in the general price level, once stimulated, asserts itself, is both a delicate and lengthy task. It cannot be attempted here. It suffices to note the ordinary distributive results of the process; with the important reservation, however, that they do not occur in the measure that the rise is occasioned by a general reduction in the productivity of industry such as might be caused by war.

There are firstly what may be called the direct results. Prime costs of production do not increase as rapidly as prices, and supplementary costs rise even less rapidly than prime costs. Prices rise faster than wages and interest charges, and rents tend to remain fixed by leases and other arrangements. Especially in the first year or two of rising prices, the rise in wages tends to be slow; in the later stages it ordinarily becomes more rapid. Thus Mitchell in his study of wage and price movements during the Greenback Period in the United States (1860-80) writes that “... The table shows an almost universal rise of wages during the war though a rise far from equal to the advance of wholesale or retail price." And in his study of price and wage movements from 1890-1910 in the United States he writes, “The figures indicate that the prices of labor are influenced by changes in business conditions, but in less measure than the price of commodities, even at retail. The general average declines after the panic of 1893, recovers in 1896, advances in 1898-1903, makes very little gain in the dull year of 1904, and then rises rapidly again in 1904-7. But the degree of rise and fall is considerably less than that of commodities at wholesale and just about the same as that of food at retail."

The lag of wages behind prices varies in degree in different industries and occupations, for neither prices nor wages go up uniformly. The general direction of wage change is marked, but there is nevertheless considerable variation in the amount of wage change. These variations in wage change are to be explained by the fact that the wage earners tend to fall into groups whose economic fortunes are in some measure independent of each other. They therefore are only slowly affected by changes in each other’s position.

On the other hand, since the increase in expenses of production in most industries tends to lag behind the rise in the price obtainable for products, profit returns increase during such periods, especially in industries in which the wages bill is an important part of the expenses of production. To quote Mitchell again, “The net resultant of these processes is to increase profits. Of chief importance is the fact that supplementary costs rise slowly in comparison with the physical volume of business.... In many instances prime costs also lag behind selling prices on the rise...."

The definite exception to this last conclusion is when the rise in prices is caused by general lowering of the productivity of industry. And so also it may be said that to the extent that higher prices are merely a mark of an increased cost of labor, or a drop in the efficiency of industrial enterprises, it does not follow that profits are growing. It is generally held that there is such a falling off in the efficiency of industrial enterprises, and an increase in the cost of labor in a period of very rapid business expansion and rising prices especially toward the end of the period. Mitchell writes: “... Prosperity is unfavorable to economy in business management. When mills are running overtime, when salesmen are sought out by importunate buyers, when premiums are being offered for quick deliveries, when the railways are congested with traffic, then neither the over-rushed managers nor their subordinates have the time and the patience to keep waste down to the possible minimum. The pressure which depression applies to secure the fullest utilization of all material and labor is relaxed, and in a hundred little ways the cost of business creeps upward."

Then there are the indirect effects of the process of price change upward. Since profits generally are large, production tends to be stimulated and the volume of production increases. The turnover of industry is quickened somewhat. Plants are more fully utilized, and unemployment is small. More overtime is worked. The total earnings of the wage earners are likely to advance more than wage rates. The extent of the divergence between the increase in hourly or piece rates and weekly or yearly earnings is likely to vary greatly according to the nature of the causes of the price movement. When the price movement is just the reflex of a situation of depreciated paper money, for example, the volume of production may or may not be increasing.

An interesting study of the divergence between hourly earnings and weekly earnings for the recent war period (Sept., 1914-March, 1919) is contained in one of the Reports of the National Industrial Conference Board. In the metal industries (those most directly affected by the war) the advance in weekly earnings for men was stated to be 103 per cent. as against 71 per cent. in hourly earnings. In the rubber and chemical industries the increases in weekly earnings were greater than in hourly earnings also, but not to the same extent as the above. In the textile industries the percentage increases were practically equal, while in the boot and shoe industry the increase in weekly earnings for men was less than the increase in hourly earnings. And for women in most industries the weekly earnings show the smaller per cent. of increase. Of course, figures of yearly earnings would be more significant as a comparison.

It is not easy to reach a general conclusion in the matter. It may be said that if the increase in prices is but the mark of an ordinary business revival with no unfavorable attendant circumstances weekly and yearly earnings will be favorably affected. Whether they will be affected sufficiently to prevent real wages from falling, particularly at the beginning of the period of rising prices, whether towards the end of the period real wages may not actually have increased these are questions it is not possible to answer except as regards a concrete situation. And if the increase in prices is the result of currency inflation, or of a general falling off in the level of production, weekly earnings are likely to be even more unfavorably affected during the period of price increase than hourly rates.

4. The effects of the process of falling prices may also be considered as direct and indirect. The direct results are somewhat of the opposite character to those just related for a period of rising prices. It is difficult to generalize about them. If the period of falling prices follows closely upon a period of sharply rising prices, during which latter period wage increases lagged greatly behind price increases, the tendency for wages to rise may continue to manifest itself for some time after prices have begun to drop. An example of such a period is furnished by the years immediately following the Civil War. In the case of the price decline of the year 1920-21, however, wage decreases have come promptly and this is more likely to be the ordinary case. Unless industry in general becomes more efficient during the period, a continued fall in the price level tends to bring about a fall of some degree in the wage level. However, just as in periods of rising prices the wage increase usually tends to lag behind the retail price increase, and even more behind the wholesale price increase, so in times of falling prices, wages often tend to fall more slowly than retail prices, and much more slowly than wholesale prices.

The wages of different groups do not fall equally. The same dispersion that was noted in times of rising prices is found equally in periods of falling prices. This is to be explained in the same way as the dispersion which occurs in periods of rising prices. Organization, however, is likely to play a more decisive part in resistance to reduction of wages than in demands for increased wages. Industries in which the wage earners are highly organized generally find it more difficult to economize by way of wage reduction than industries in which the wage earners are not organized.

The range of profits of industry during periods of falling prices will depend upon the nature of the causes which produce the decline. If it is simply the result of an increase in industrial efficiency, or progress in the industrial arts, profits will continue to be satisfactory and may even be on the increase. If, on the other hand, the price decline results from the occurrence of those short periods of forced liquidation known as crises, and is accompanied by that state of recuperative and cautious business activity known as depression, profits in most industries are apt to be quite low. Such was the 1893-96 period in the United States. During the period of forced liquidation and immediately thereafter, the number of bankruptcies is likely to be high. No general statement is possible concerning the duration of such a period of depression and low profits; all accompanying circumstances play a complicating part in retarding or hastening business recovery. The present depression of 1920-21 is almost of unprecedented duration, for example. Nor should it be supposed that the state of depression must be identical with the period of price decline. Given favorable circumstances, the price decline soon leads to a search for new methods of economy in production. Raw materials are likely to fall in price. Supplementary costs are rapidly reduced. The price of labor tends to fall. Even though prices continue to fall slowly, profits may rise to a level encouraging to business activity. This may also be true of a period of liquidation not preceded by crisis.

In conclusion, it can only be repeated, however, that confident generalization as to the direct effects of falling prices is impossible. Each business cycle has its own peculiar characteristics it is unique as Mitchell says.

So, too, as to the indirect effects of a general fall in the price level. No one description can be given that will hold true of all instances. If the main cause at work is of the kind that may be called “natural,” for example, a gradual increase in the productivity of industry, or a decided falling off in gold production, such periods are not necessarily periods of depression in industry. Employment may be constant and weekly and yearly earnings high. Thus the period of 1873-1896 in the United States was one of declining prices and it is generally admitted that that period was one of great industrial activity. Moments of excessive activity are rarer in periods of falling prices than in periods of rising prices, but the average amount of unemployment may be either greater or less. Again, if the decline of prices is in reality a movement from a state of depreciated paper money to a gold standard, there is a possibility that the period may be one of industrial activity due to a prevailing confidence in a coming recovery. It is more likely, however, that such a period will be characterized by a falling off in business activity and an increase in unemployment, particularly at its commencement.

Lastly, if the price movement is an indication of such a period of depression as may precede and usually does follow serious industrial crises, it is ordinarily accompanied by liquidation and curtailment of production. In these periods, and especially at their height, unemployment grows and earnings fall more than wage rates. Or wage rates may remain comparatively steady, but weekly and yearly earnings will fall. The extent to which this fall in earnings will go depends upon the seriousness of the industrial maladjustments. Still it is safe to conclude that a period of serious depression following upon a crisis is the least favorable phase of the industrial cycle for the wage earners notwithstanding the fact that wages frequently fall more slowly than wholesale prices, and somewhat more slowly than retail prices.

5. Our object in discussing the effect of price movements on distribution is to discover how they complicate the problems of wage settlement. Before proceeding to this main purpose, however, it is desirable to pay particular attention to one doctrine of the relation of wage change to price change which figures prominently in current discussion.

That is the doctrine known as the “vicious circle of wages and prices.” It has been well stated by Mr. Layton: “It is often asserted that a rise in wages is only a move around a vicious circle, the argument being put thus; starting with a rise in wages achieved, let us say, as the result of a strike, the increased wage bill will add to the cost of production, and so raise prices; if the rise becomes general, the cost of living will increase and diminish the purchasing power of wages; this will produce a renewal of discontent among the working classes and result, perhaps, in a further demand, culminating in a strike for still higher wages." This doctrine is affirmed somewhat indifferently, when the demands for increased wages are made during a period of a relatively steady price level, or during a period in which the price level is rising steadily. What elements of truth does it possess and what is its importance?

The first thing to note is that the series of events visualized in the above quotation can be set into motion by any other cause which disturbs the price level just as well as by a demand for increased wages. For example, a great influx of gold into the United States may take place as a result of a steadily favorable balance in international trade. Bank reserves may mount, discount rates may fall, and if all other circumstances happen to be already favorable, a period of increased industrial activity may follow. Demand for basic products will increase and prices will begin to rise. With the tendency of prices to rise, the general demand for labor will increase. Wage demands will follow, and all the conditions required to make the theory applicable are supplied.

Certain conclusions may be stated at once. Firstly, the industrial situation is rarely so balanced, no matter what the price situation, that a measure of wage increase may not be possible without an equivalent increase in prices. The distributive situation is never one of static equilibrium. The gain of one group or agent of production may simply be another’s loss. Each group or agent strives for a large return. If wages go up, profits may go down, or new methods of production may be devised, or strikes may cease. The same possibilities exist in essentials, irrespective of any prior price movement. The movement of prices upward simply gives ground for the presumption that there is a greater possibility than usual of increasing wages without causing equivalent price increases.

It is incorrect to reason that all participants in distribution must come off equally well in this succession of changes. A continuous testing out of the distributive effectiveness of the various agents of production, and of any divisions which may exist within each agent, occurs. The various groups of wage earners may be better or worse off than before. When the price level has shown a prior tendency to rise, there is good reason to believe that the wage earners stand to gain by a vigorous policy of assertion. For then in particular, unless the general rise in prices is to be accounted for by a reduction in the general productivity of industry (a possibility always to be considered), wage increases can come out of the extra income which the other agents are in receipt of because of the price movement.

Secondly, in normal times the process visualized could not go on indefinitely. Sound banking practice imposes a limit upon credit expansion. In an abnormal time such as Europe is now passing through credit expansion may, indeed, continue beyond the point dictated by banking reserves. Thus depreciation ensues. This, in turn, is ordinarily limited by the desire to return to a gold basis; otherwise it results in financial chaos. Barring out this last eventuality, the process of price change has a final limit, which must set a limit upon wage increases.

What these general theoretical propositions regarding the idea of the vicious circle do show, is that this idea is in itself an attempt at a complete theory of distribution. That theory, if consistently formulated, would be that the product of industry is already being shared out among the various agents of production in such a way that an attempt on the part of any agent to get more than what it is receiving at any particular time can result only in a price increase. For each agent, it is presumed, is getting its “normal” share as settled by the general economic position and certain unchangeable economic laws. The idea is but the shadow of the theories of normal distribution mentioned in preceding chapters. It does, in common with these theories indeed draw attention to certain fundamental economic relationships. These Judge Brown has expressed well in one of his decisions which reads, “The element of truth in the ‘Theory of the Pernicious Circle’ is that, at a given stage in the history of a particular society, there is a limit to the amount which should properly be awarded for wages, both wages and profits have to be paid out of the price paid by the consumer. If, whether by collective bargaining or by strikes, or by judicial regulation on the part of the public authorities, an attempt is made to narrow unduly the margin of profit on capital, then there is likely to be a period of industrial dislocation, and every class in the community is likely to suffer." But the idea has all the misleading effects which have been attributed to that general theory of distribution of which it is a corollary. It is derived from an analysis of the distributive process which does not fit all the facts.