The Settlement of Wage Disputes

by Herbert Feis

The answer to the first of these questions is simple. In periods of rising prices wage increases tend to lag behind the retail price increase, and very much behind the wholesale price increase. The chief aim, therefore, of any plan for the adjustment of wages to upward price movement must be the protection of the interests of the wage earners. Changes in the distributive situation that are unfavorable—judged by reference to the distributive outcome to be sought by any policy of wage settlement—must be prevented, if possible. It is the second of the problems which presents the difficulty.

There is one method of wage and price adjustment which holds an important place in current discussion. Indeed, it has tended to be the prevailing method although it has never been applied systematically in the United States.[58] That is the method based upon the doctrine of the maintenance of the standard of living. This doctrine aims to maintain real wages at a constant level throughout the course of price change. The labor unions have usually given it their support, finding in it a strong basis for their claims.[59] Is it the best possible method of adjustment considering the end to be attained?

Its advantages are definite. It is a simple claim. It is a claim the justice of which could be denied only under unusual circumstances. It has in the past brought considerable benefits to the wage earners, because they have usually stood to gain by any vigorous assertion of their interests.

What are its disadvantages? The first of its disadvantages is in the difficulty of interpreting the doctrine into practical policy. There has seemed to be one straightforward way of interpreting it. Investigations have been made from time to time of the commodities and services on which the working class household tends to spend the bulk of its income. As a result of these investigations budgets have been drawn up which were deemed sufficiently representative of the main currents of expenditure of the mass of wage earners at a given time and place. On the basis of this data an index number of the cost of living for the mass of wage earners, at the given time and place, has been prepared by methods too familiar to require explanation here. In the past the price collections ordinarily used were composed mainly of the prices of foodstuffs. But recent data covers a much wider portion of the total expenditure.[60] An index number for the cost of living having thus been prepared, it has been conceived that the variations in this index number were indicative of the change in the cost of living.

This practice, however, is not altogether satisfactory. Firstly, the concept of a representative budget is necessarily more or less artificial; the budgets of wage earners, even in the same class, vary considerably in composition. Thus hardly any figure on the change of the cost of living has been given out without being challenged by one or other of the interested parties. Secondly, for all except the lowest grades of wage earners, the direction of expenditure changes somewhat as particular prices change in a different measure. This second disadvantage was noted particularly during the war, when the supplies of certain commodities were limited or rationed. Thirdly, and this difficulty is of a more serious nature, the prices of some or many of the articles which occupy an important place in all calculations of the cost of living of the wage earners may change in a different measure, or even in a different direction, from the prices of the other commodities produced within the country. Food prices in particular are apt to respond to different influences than those governing the general price level.[61] However, it is only from the course of change of the price level representing all important commodities produced within the country that it is possible to get an indication of the change in the total conglomeration of market values, which has been called the product of industry. Even then the indication is far from an exact one.

Let us consider the two cases in which the change in the prices of some or many articles important in the wage earners' budget diverges considerably from the change in the index number of the prices of all important commodities produced within the country. The first case is that in which the prices of the relatively small collection increase much faster than the index of general prices. Such might be the fact in the event of two bad harvests in succession. If wages are increased in accordance with the movement of the prices of the relatively limited collection of commodities, the result of the wage increase may be an increase in prices in general. As a result of this the wage earners may be better or worse off than before, depending upon circumstances. The second case is that in which the prices of the relatively small collection of articles may increase less than the index of prices in general. In this case any wage increase undertaken in accordance with the change of prices of the relatively small collection would fall considerably short of that which could have been ventured without fear of causing another price increase—and without waiting for the test of profit accumulation discussed elsewhere.[62]

Fourthly, changes in a relatively small collection of prices, particularly if foodstuff prices bulk largely in the collection, are apt to be more convulsive than general price movements. They are likely to vary more than general price movements from year to year, and, indeed, from season to season. This is so, although it is true that retail prices tend to be far more stable than wholesale prices.[63]

Lastly, as Mitchell states, as a business factor crops are less an effect than a cause of change in conditions. "Good crops tend to bring prosperity and poor crops depression in the seasons which follow...."[64] If foodstuffs fall because of a good harvest, it is more likely than not that the next industrial year will be a good year. There is, therefore, a preliminary presumption that there will be no occasion for wage reduction (if wage adjustments to falling prices are contemplated—which subject will be discussed immediately hereinafter). If foodstuff prices rise because of a poor harvest, there is a preliminary presumption that the succeeding industrial period will not be one of very great activity. Therefore, an increase in wages corresponding to the rise in the prices of food products would not serve to increase very much, if at all, the command of the wage earners over foodstuffs. This possibility of a divergence in the movement in the price of provisions and of wages was pointed out, indeed, by Adam Smith. To give the explanation in his words, "In a year of sudden and extraordinary plenty, there are funds in the hands of many of the employers of industry, sufficient to maintain and employ a greater number of people than had been employed the year before; and this extraordinary number cannot always be had. Those masters, therefore, who want more workmen bid against one another, in order to get them, which sometimes raises both the real and money price of their labor. The contrary of this happens in a year of sudden and extraordinary scarcity."[65]

2. Such are the disadvantages attaching to a policy of wage adjustment based on the doctrine of the maintenance of the standard of life. It may now be asked whether there is any alternative method to which smaller disadvantages attach?

As to the matter of alternative, it is my opinion that a better plan of adjusting wages to price movements can be devised. The basis of it should be the change in the index number of prices of all important commodities produced within the country. Any scheme of adjustment arranged on that basis would have one distinct advantage. It would be representative of the fundamental distributive relationship—that is the relationship between the various levels of earnings and the total product of market values. It would assure a closer accord between wages and total product than the widely used method already studied.