The Gap Between Prices and Wages

by PHILIP MURRAY

I

ORGANIZED labor in the United States has one basic objective — an ever improving standard of living for all workers everywhere. Full employment and full production, fair wages and fair hours, are but the means of achieving our goal of decent homes, adequate diets, and improved health for the families of America, and better educational opportunities for their children.

The well-being of both the individual and the group is dependent upon a high consumption level economy with maximum purchasing power. These in turn promote full production and full employment. In other words, when men have money to spend and are using it to buy the things they need and want, demand increases. It starts with the consumer, goes to the retailer, the wholesaler, the manufacturer. The manufacturer must keep his plant fully manned to turn out the goods needed to satisfy demand. This in turn puts money in the workers’ pockets and keeps the cycle in operation.

To achieve our goal of a better standard of living we must have all-out production, which today means greater capacity than now exists in many industries. We must have a greater availability of products at lower prices so that the majority of people can buy and consume. We must also have a larger share of the profit dollar going to the mass of American consumers in the form of increased wages.

Workers have been getting the short end of the stick. Briefly the situation, according to statistics from the United States Bureau of Labor Statistics and the Department of Commerce, is this: —

From January, 1945, to January, 1948: —

1. The cost of living rose 31.4 per cent.

2. Weekly wages before taxes in manufacturing increased 11 per cent.

3. Corporation profits after taxes rose 90 per cent.

Increases in industrial profits reaped at the expense of wages make our economy more and more unstable. The average worker finds himself behind the eight-ball, unable to buy the things his family needs to maintain health and peace of mind. That is why the CIO and its affiliated unions are seeking to obtain substantial wage increases for American workers through the process of collective bargaining. We must restore the loss in real income suffered as the result of inflation. This can be achieved without any justifiable increase in prices because of the phenomenally high level of profits which American industry currently is enjoying.

One argument used against wage increases is that they are inflationary. Actually, increased wages in themselves are not inflationary since it does not necessarily follow that they require increased prices to support them. Wages can be increased by lowering profit margins.

The reason prices moved up after each wage increase since the war is that industry has been operating on the theory that it would make hay while the sun shines. On the other hand, labor asked for wage increases to raise its rapidly falling standard of living.

After V-J Day, overtime pay was eliminated, workers were down-graded, and many were shifted from high-paid wartime jobs to lower-paid jobs in civilian industries. In January, 1945, the average industrial wage before taxes was $47.50 per week. By the end of that year, wages had dropped to $41.20 per week. It was this development that led unions to ask for the first round of wage increases, which were granted in 1946.

However, the wage increases were not large enough to result in a return to the conditions of 1945. In addition, later, when price controls were removed, prices were raised so high that workers found that their pay checks could not buy the food, clothing, and other things they needed. These two factors — inadequacy of the wage increases of the first round, plus the rapid rise in the cost of living due to decontrol — led to the second round of demands for wage increases.

The unions asked for raises out of profits which were extraordinarily high at the time. When wages were finally raised, we felt we had been given a new lease on life. But no sooner had the raises been granted than industry unjustifiably jacked prices up — even higher than was necessary to cover the increases in wages. Wage increases could have been taken out of the high profit margins, and industry would have continued to operate on a profit — but one that was more reasonable. Industry refused to do this.

Industry knew that demand for goods was still high; therefore, consumers were forced to pay highly inflationary prices for war-scarce goods. A statement by Irving S. Olds, Chairman of the Board of United States Steel, in his annual report for 1946 demonstrates the attitude of industry: —

Operations are at an all time high. Profits should be sufficient to enable a fair return to be paid to the owners of the business in the form of dividends and also to permit an adequate amount to be set aside for future needs since “the day will come when steel operations are at a lower rate than at the present time.”

In other words, the steel industry, in maintaining high prices, has been more interested in ensuring its position against a depression than in the national economy or in the standard of living of the people.

Wage increases may have an inflationary effect if they add to the income stream during a period when there is either insufficient production or poor distribution of available supply. However, at such a time, the level of incomes should not be reduced nor should it be prevented from increasing. Instead, scarce commodities should be rationed and allocated equitably. Only through such a well-rounded anti-inflation program can our wages be protected from another onslaught brought on by further unjustified price increases.

2

A VERY real problem facing our people today is how to stretch the weekly pay check so that it will cover the necessities. A welder in Detroit writes he is paying more than he can afford for meat and shirts. A weaver in Richmond says she has nothing but hand-me-downs for her children. Everywhere the complaints are the same: the cost of living is too high.

An examination of retail prices from the Bureau of Labor Statistics shows what has been happening to prices since OPA was wrecked in June, 1946. In the eighteen months prior to that time, food prices increased 6 per cent; eighteen months later (the period ending with January, 1948), they had increased 42 per cent. Clothing went up 10 per cent under OPA, 22 per cent after OPA was killed. Rents were held well in check under OPA with an increase of only 0.2 per cent during the eighteen months prior to June, 1946. In the following eighteen months, under weakened controls, large numbers of tenants were forced to pay increases of 15 per cent, but when this is averaged with those whose rents remained frozen, the national average was 6.4 per cent. However, rents are still well under what they would be if controls were removed.

Although since June, 1946, there have been several interruptions in the price advance, the military armament program will probably tend to keep prices at their present high levels or force them still higher. As production is diverted from consumer goods to war goods, additional scarcities of consumer goods will develop and prices will tend to rise. The 1940 story will be repeated. When metals are used for planes and guns, the cost of vacuum cleaners and refrigerators goes up.

The gap between prices and wages which steadily widened during 1945 did not decrease during 1946 and 1947 in spite of two rounds of wage increases. By correcting the average weekly take-home pay for consumer price changes, we can compare money wages with real wages — the amount of goods that can actually be purchased by the weekly wage.

As an example, let us take a typical industrial worker, Tom Blake, married and the father of two children. In 1945 Tom’s weekly money earnings were $47.50 before taxes. By the end of 1947, his weekly earnings had gone up to $52.69 before taxes — but he and his family were much worse off than in 1945. By the end of 1947, price increases had devaluated his money to the point where he could purchase only $40.09 worth of merchandise in terms of early 1945 dollars. So, while money earnings for the average industrial wage earner increased a little over 11 per cent, actual real earnings declined by over 15 per cent because of rising prices.

In post-war America we have been forced to live under a steadily lowering standard of living and a steadily decreasing real weekly wage. This is exactly opposite to what a strong and healthy economy should provide for its people. Prosperity should mean higher living standards, not lower.

The question is sometimes raised as to whether we are entitled to enjoy an increasing standard of living at a time of ruination and insecurity in Europe and Asia. For the answer, let us examine our own situation. We have in America a distortion in our economy which has made it possible for people in the upper income groups not only to maintain but to increase their standards of living at the same time that the standards of our workers are dropping. Wealthy persons have incomes large enough to withstand the price increases. Actually, the savings of this group have been increasing steadily since 1945, according to the Liquid Asset Survey of the Federal Reserve Board. On the other hand, workers’ wages have been insufficient to meet the price increases which materialized since the war, and their savings are being liquidated.

So far as Europe and Asia are concerned, the United States fortunately is in a position to ship heavy equipment abroad and to feed and clothe the needy. At the same time, however, we should distribute the profit dollar more equitably here so that our own workers need not suffer. We should not permit the low level of living in Europe to pull our own workers down. Instead, we should maintain and increase our own standard and gradually pull them up to it.

In January of this year, the Bureau of Labor Statistics issued a budget for “a modest but adequate American standard of living” for a family of four. Covering 34 cities, it cited a range of from $3004 for families in New Orleans to $3458 in Washington, D.C., with an average of about $3200. These budgets are low since the figures apply to June, 1947, and do not take into account the rise in retail prices which took place after June, 1947. When the Bureau’s figures are adjusted to compensate for the rise in prices, the national average is $3450 instead of $3200. The cost in New Orleans is $3175, and $3634 in Washington, D.C.

The Bureau of Labor Statistics declares that “this is not a ‘subsistence’ budget, nor is it a ‘luxury’ budget.” It allows the wife of the family one wool dress about every five years, and permits her to half-sole her shoes every other year. Each member of the family is allowed one visit to a dentist every two years, and the man of the house may have one beer a week or its equivalent.

Most workers today are earning less than $3450 per year. It is difficult to figure out, even theoretically, how close the average family comes to enjoying this “modest but adequate American standard of living,” because annual take-home pay figures are not available. The average weekly earnings when multiplied by fifty-two weeks come to $2730, and this does not allow for any time off.

3

UNDER present-day conditions the most immediate method of bringing relief to the majority of American families is by putting more money in their pay envelopes. That is why labor is asking for raises.

Although the United States Steel Corporation recently announced a 25-million-dollar cut in the price of steel, it is only a drop in the bucket, certainly not enough to affect inflation. The 25-milliondollar cut amounts to approximately $1.24 a ton, or nearly one twentieth of a cent per pound of steel. Transfer that cut to the cost of a pot, pan, or automobile and it will have very little effect. Moreover, we must not forget that whereas U.S. Steel cut prices $1.24 per ton in April, 1948, it had raised the price of steel $11.32 per ton between April, 1947, and April, 1948!

Labor welcomes price cuts, but the present reductions by the steel and electrical industries are paltry and insignificant and are intended primarily for headline purposes. They mean very little when translated in terms of cost-of-living items. We are convinced that steel, electrical, and other industries are in a position to make sizable rather than token price reductions, and at the same time retain a large enough price margin to grant the unions’ demands for real wage increases.

This is a new industry tactic: refusing, in the name of inflation, to grant wage increases, and making what the Wall Street Journal (May 1, 1948) called “modest price reductions.” These modest price reductions will bring no relief to families who depend on wages for their living. The cost of food, clothing, rent, medicine and medical care will not drop because of these price cuts. Therefore, wages must be raised so that families can have an adequate income that will provide a decent standard of living on current prices. If industry would recognize this fact, it would increase wages, lower or hold the price line, and allow profits to drop to a justifiable and conscionable level.

High prices and low wages have resulted in the rapid depletion of wartime savings. Families that had saved with the hope of buying a new car or to provide against emergencies have been forced to spend their savings to keep the wolf from the door.

Surveys by the Federal Reserve Bank indicate that savings deposits have leveled off and that withdrawals by the lower income groups are for purchases of basic necessities. U.S. Savings Bonds are also being redeemed. By June, 1947, more than half of the total Series E savings bonds in the lower denominations had been redeemed. During the first half of that year, for every 100 bonds sold in the $25 denomination, 194 were cashed in. In the $1000 bonds, for every 100 sold, only 40 were cashed in. The large savings are getting larger and the small savings are disappearing.

Today industry is in a position to grant increased wages without increasing prices. That does not mean that every single firm in the United States can grant such raises. It does mean that corporations, by and large, are enjoying exorbitant, recordbreaking profits with which to do it.

In spite of the taxes, which business claims are still too high, corporate profits after taxes in 1947 were 17.5 billion dollars. Compare this with the wartime profits of 10 billion dollars after taxes in 1943, and with 8 billion dollars in the peacetime boom year of 1929.

These profits show that during the last two years industry easily could have held the price line and still have reaped profits in excess of any peacetime year. Instead, wage increases were granted and more than abundantly passed on to consumers, so that in the final analysis industry was making greater profits, after granting the wage increases, than it did before.

A reading of the 1946 and the 1947 profit statements of our large corporations shows how business is improving for them. U.S. Steel made 88.6 million dollars in 1946 and 153.3 million dollars in 1947, an increase of 64.7 million dollars. General Motors increased its profits 212 million, from 87.5 million dollars in 1946 to 299.8 million in 1947. International Harvester showed an increase of 26 million dollars.

Recently the CIO investigated the effect that new substantial wage increases would have on 1947 profits if wage increases were absorbed. Using Department of Commerce statistics, we found that if workers were given a 20 per cent wage increase, 1947 profits would drop to their 1929 level — that is, 8.4 billion dollars. If workers were given an 18 per cent wage increase, profits would drop to their war level of 1945 — that is, 8.9 billion. If wages were increased only 10 per cent, profits would still amount to their fantastically high level of 1946 — that is, 12.5 billion. These figures do not apply to every corporation. They are an average of the entire corporate sector. However, they do give a clear indication that industry is in a position to grant wage increases to employees this year without any additional price increases.

The increased corporate earnings over the past years reflect a dangerous shift in the distribution of our national income. A greater proportion is finding its way into business profits, dividends, and interest, while a much smaller proportion is going toward wages and salaries. In 1945, excluding the pay of officials, corporations paid 60 billion dollars in salaries and wages. Their profits were 8.9 billion. In other words, after taxes, they made one dollar in profit for every seven dollars paid out in salaries. In 1947, wages and salaries came to 68 billion while profits leaped to 17 billion. This means that corporations paid out only four dollars in wages and salaries for every dollar taken in as profits. Seven to one in 1945, four to one in 1947.

4

FREQUENTLY it is stated that current high profits are illusory because they include inventory appreciation which may become a loss factor if prices drop. A second point is that depreciation charges which are legally included in expenses deductible from taxable profits are insufficient to cover replacement costs. A third is that there is a shortage of venture capital for use in building and equipping new plants and modernizing old ones, and that money from profits must be used for this purpose.

So far as inventory profits are concerned, they are as real as any other kind of profits. Corporations pay taxes on them and do not separate them out in their accounting systems. Actually, however, much of the inventory profits is concealed and never reported as profits. Corporations do this legally by using the LIFO (Last In, First Out) Accounting Methods. Those not using LIFO have many other ways open to them to accomplish the same end.

Like inventory losses, the question of depreciation charges is a two-way street. There are those who today complain because the law prohibits them from depreciating their plants, constructed during a lowcost period, at present-day high replacement costs. Yet these same groups would protest, in a period of low replacement costs, if it were suggested that they base depreciation on values lower than the original cost of the plant.

So far as equipment replacements or additions are concerned, machinery prices have risen only half as much as the cost of living, according to the Bureau of Labor Statistics. Moreover, according to the president of the Machine Tool Association of America, new machinery is 50 per cent more efficient than pre-war equipment.

Industry, by asking for depreciation on the basis of replacement costs, is requesting that consumers pay the cost of future machines before they are installed, rather than the expense of machines currently in use. Depreciation reserves are already bloated by the wartime five-year speed-up and various other reconversion slush funds which industry was permitted to set up. Industry will be able to depreciate higher-priced machinery after it has been installed and is in operation.

Former Secretary of Commerce Harriman has stated that venture capital in general is available. Poorly managed corporations are bound to suffer from lack of venture capital, and rightly so. However, companies operating on a sound basis can receive loans for improvement and expansion from banks, insurance companies, and the RFC, and new securities are issued weekly for venture capital.

The fact remains that today only 39 per cent of profits are paid out as dividends. But dividends are no reflection of profits. Corporations are paying for expansion out of profits instead of money available on the savings market. Even so, dividends are still above their pre-war levels in spite of the fact that three fifths of profits are undistributed and available for expansion. When profits become excessive, as they are today, one segment of the economy is inordinately benefited at the expense of labor.

Thus a smaller and smaller share of income is becoming available for expenditures on consumer goods while more and more income is being channeled into the wealth of a relatively small group of individuals and corporations. The aggrandizement of the national income has resulted in a dangerous concentration of power and influence.

At the present time, 250 large corporations control two thirds of the usable manufacturing facilities of our entire country. More than a hundred of the largest corporations are controlled by eight groups of banking interests. In the steel industry the ten largest corporations hold more than three fourths of the ingot capacity; three banking houses control eight of these ten producers. These statistics were published by Senator Murray’s Small Business Committee in a report entitled, “Economic Concentration, World War II.”

What effect does this concentration of power have on the average citizen? One of the most direct effects is higher prices. As monopolies have become stronger, they have been able to control production, maintain an economy of scarcity, and keep prices high. Last February the major steel companies simultaneously announced a $5 a ton increase in the price of semifinished steel, at a time when the steel industry was making the highest profits ever. There had been no wage increase which they could cite as a reason — the monopoly simply decided to hike prices because the traffic could bear it. In the long run, the consumer, workers and professionals too, pays for the resultant profits, in the form of higher prices for household goods.

It is an old axiom that when demand is high and supply low, prices are high, and when supply approaches demand, prices drop. Today, monopolies in some industries are rigidly controlling production and prices to the detriment of the consumer. Discussing this point, Business Week of August 2, 1947, says: “The law of supply and demand, temporarily, isn’t working as it is supposed to. When demand fell off, producers used to mark down prices in an effort to stimulate buying. Today output is cut to support prices. A case in point is shoes.”

This is the shoe story. In 1946, according to the Department of Commerce, the shoe industry produced 528 million pairs of shoes. When prices had begun to waver because consumption was falling, shoe workers were laid off and plant operations were curtailed. A sufficient shortage was created for the industry to bolster its price structure. In 1947, production was reduced by 60 million pairs of shoes, while prices were upped 35 per cent.

Shoes are not an isolated case; they are typical of a trend. Cotton textile production was cut 21 per cent and prices raised 45 per cent. Wool production was cut 14 per cent, prices raised 19 per cent.

A year ago, in June, 1947, in his economic report to Congress, President Truman said: “Certain businessmen seem motivated in their business decisions by the belief that the consumptive capacity of the country is severely limited, and that the occurrence of periodic depressions is unavoidable. They consequently seek relief from business difficulties by limiting production and they hope to avoid future business difficulties by limiting the capacity of their plants and industries and by withholding new production techniques.”

Prices have zoomed because industrial monopolies are in a position to create artificial shortages and to charge the highest prices the public can bear. The price increases go far beyond any wage increases and in fact have little discernible relation to them, although we constantly hear the cry that wage increases are inflationary.

Let us examine the relation between wage increases and price increases in a typical industry. In the period from June, 1946, to January, 1948, according to the Bureau of Labor Statistics, the wholesale price of finished manufactured goods increased 47 per cent, while wages had increased only 21 per cent. Since wages are less than 40 per cent of the total cost of production, according to the most recent census of manufacturing, then, assuming no absorption, prices should have risen 8 per cent instead of 47 per cent. The wage increase that had been granted to help workers of finished goods cope with the already inflated prices should have had little or no effect on prices. The industry, however, not only would not reduce its profit margin, but maintained it by adding 8 per cent to the price, and went even one step further by adding an additional 39 per cent to swell still more an already swollen margin of profit. Thus prices were raised five times the amount of the increases in wages per unit of goods — and all consumers suffered.

5

ONE solution to the price problem is increased production and increased consumption predicated upon the elimination of profit gouging. By raising wages to meet the present price level and at the same time holding current prices in line by cutting excessive corporate profits, industry can raise the American standard of living and stabilize our economy. The Council of Economic Advisers in its “Second Report to the President” stated: —

If we are to achieve and stabilize maximum production according to any reasonable interpretation of America’s capacity to produce, we must in future have much higher consumption in all the lower and middle ranks. . . . The enlarging production of an industrially efficient nation must go increasingly to filling in the consumption deficiencies of the erstwhile poor.

Some spokesmen for industry have blamed labor for low production, saying the 40-hour week prohibits workers from putting in a longer work week. Nothing could be farther from the truth. The Fair Labor Standards Act provides that in certain industries any time worked over 40 hours shall be paid for at a rate equal to one and one-half times the regular rate of pay. In many industries workers have been working overtime regularly and are paid accordingly. In other industries they are willing to work overtime if they are properly compensated. Production has been increasing about 3 per cent each year since the war. During the past year, in the steel industry, the man-hours worked increased 18 per cent while the total productivity increased 34 per cent. In other words, steel production has increased considerably in the past year. Over-all general productivity increased 27 per cent from 1938 through the first half of 1947 according to the “Survey of the Economic Situation and Prospects of Europe,” prepared by the Research and Planning Division of the Economic Commission for Europe.

Industrial workers are especially aware of the importance of production and the effect that largescale operations have in reducing unit costs. During the war they took a great pride in their wartime production records, and today they would experience a personal satisfaction if their efforts resulted in helping to bring prices down by lowering unit costs.

Labor’s critics are inclined to blame low production on strikes. They seem to forget that a strike is a measure of last resort, used only after all other measures have failed.

During 1947 there were roughly 100,000 contract negotiations plus countless grievance negotiations. Most of these were settled quietly without any fuss or feathers through the medium of collective bargaining. The workers and employers or their representatives worked out their problems to their mutual satisfaction without bringing in any third party. Only 11,338 disputes were handled by the Federal Mediation and Conciliation Service. Of these, only 2113 were work stoppages; the remaining 81.4 per cent never developed into stoppages. This demonstrates that there are relatively few strikes and that unions prefer to settle disputes through collective bargaining if possible.

The percentage of work stoppages is small and the duration of strikes is short. In 1947, 99.6 per cent of the total time spent in work in the United States was not interrupted by work stoppages. In other words, only four tenths of one per cent of the total potential working time was lost in strikes. Even in 1946, when such basic industries as steel, automobile, electrical, and coal were on strike, only 1.4 per cent of the total potential working time was lost because of work stoppage. Workers can afford to spend very little time off the job.

6

IT IS obvious that wage increases directly benefit union members whose representatives have obtained raises through the process of collective bargaining. Some critics of the labor movement argue that it is only the better organized workers, or workers in the mass-production industries, who have benefited from collective bargaining. There is no justification for this argument.

It is true that during the first and second rounds of wage increases in 1946 and 1947, it was the wellorganized worker who benefited first. But as he benefited, wages in unorganized industries, in trades and services, and in the professions moved upward in about the same proportion. For example, organized workers in the steel, automobile, and electrical equipment industries won increases of between 17 cents and 18½ cents per hour. Following their lead, during the period between June, 1946, and the end of 1947, straight-time hourly earnings of workers not nearly so highly organized as in the automobile, steel, and electrical industries also moved upward to about the same extent. In the wholesale trades, the increase in average straight-time hourly earnings amounted to 18 cents; in retail trades, 15½ cents; in the food-processing industry, 19 cents; in lumber, 15 cents; in furniture, 17½ cents; and in tobacco, 12 cents.

There are groups of individuals receiving fixed income and some white-collar workers whose earnings have not kept pace with the general increases. The solution to their problem lies, not in denying wage increases to workers in organized and unorganized industries, but in federal legislation to increase the minimum wage to 75 cents and eventually to $1.00 an hour, to improve and extend social security benefits, and to increase the wages of federal, state, county, and municipal workers.

If we firmly believe in the objective of improving living standards and developing a high consumption level economy, we must see to it that the area of collective bargaining is extended and that trade-union organizations are strengthened in our American life, so that all individuals, be they white-collar workers, teachers, federal or state employees, or other persons with fixed incomes, can derive the benefits of improved living standards.

As for the timing of wage increases and the improvement of living standards, I think that now is the time to raise the real income of the mass of American consumers. And to protect purchasing power, Congress should enact controls on prices, on inventories, on distribution, through an allocation and ration system, on consumer and bank credit, and on excess profits, through taxation.

Labor-management relations have been improving and the emphasis is gradually shifting to the idea of teamwork between employer and employee. The objective is negotiation rather than work stoppage over disputes. I can sum up my position on the wage-price-profit relationship in our national welfare by saying: —

We must go forward with faith in America’s ability to provide a more abundant life for all.

We must establish goals of expanded industrial and agricultural capacity.

We must make mass products available at low prices.

We must create income levels, through higher wage levels, sufficient to establish a decent American standard of living.