The Settlement of Wage Disputes

by Herbert Feis

10.—The complications introduced into the administration of the living wage principle by changes in the general price level have yet to be dealt with. It has been seen that changes in the general price level affect the outcome of distribution and, for that reason, any policy of wage settlement must include provision for the adjustment of wages to price changes. We have now to consider how this adjustment can best be carried out.

The central authority is obviously the most suitable body to supervise the process of adjustment. The adjustment to price change should be expressed as a percentage addition to or subtraction from the existing wage. The central authority should be charged with the collection of all necessary price data. This body should then proceed upon the advice of the joint boards or councils in the industries concerned. Unless some strong reason to the contrary exists, however, a uniform policy of adjustment should be pursued—resting upon the following principles.

11.—The conclusions reached in Chapter V in regard to the policy to be pursued in the adjustment of wages to changes in the price level fall into two groups. Firstly, those which have to do with the choice of the basis of calculation of wage adjustments. Secondly, those which have to do with the choice of the actual policy of adjustment during times of rising and falling prices. The same division and order is maintained in the following attempt to sketch out a good plan of adjustment of living wage rates.

First, then, these wage rates should be varied in accordance with the movement of a price index number. This index number should represent the prices of all the important commodities produced within the country, but so weighted as to give a defined importance (50 per cent. was suggested) to the prices of those classes of foodstuffs, clothing, housing accommodations, and other commodities upon which the wage earners tend to spend the bulk of their income. It was sufficiently emphasized in the earlier discussion of this subject that this basis of calculation was in the nature of a compromise, and was not beyond criticism. Adjustments should not be undertaken unless the index number of prices has moved at least 5 per cent. (the figure is meant to be merely a suggestion) and adjustment should not be more frequent than twice a year (again a suggestion, only).

Secondly, as to the policy of adjustment to be pursued in times of rising and falling price levels, respectively. The policy for a period of rising prices can be very briefly stated. All wage rates prescribed under the living wage policy should be increased by the same percentage as the index number of prices moves upward. There is one case in which this policy cannot be justified theoretically. That is when the increase of prices can be wholly or mainly accounted for by a falling off in the general level of industrial productivity. However, in my opinion, it will be hardly practicable to attempt to distinguish this case from other cases of price increase,—save in an entirely exceptional circumstance, such as a period of war invasion.

The policy to be pursued during a period of falling prices cannot be stated so briefly. The difficulties involved have already been discussed at length.[133] The following policy based upon that analysis is tentatively suggested. The complexities of the subject are too great to permit of dogmatism. Firstly, the occasion for the price decline may be such as was termed "natural," as for example when it is brought about by a general advance in the arts of production, or by the development of the means of transport. In this case, it will be satisfactory to keep wage rates unchanged, though prices decline. It is in these periods that chance is afforded of bringing about genuine improvement in the economic position of the least favorably placed groups of wage earners.

Secondly, the price decline may be a sign of reaction from a previous period of rapid price increase, and of a general tendency on the part of entrepreneurs to keep down production costs and to proceed with circumspection throughout. Nevertheless if little forced liquidation occurs; if there has been no serious overextension of credit during the previous period; if the maintenance of the existing price level, or of a slightly lowered one, would not impose too great a strain upon the banking system—there would be no good cause to reduce wages. This judgment rests on the supposition that the facts of the industrial situation give promise that industrial recovery will take place even if prices do not drop greatly, and drop gradually rather than sharply.

Thirdly, the price decline may be caused—at the beginning at all events—by much forced liquidation of a character that is disastrous to the enterprises compelled to liquidate. It may have been preceded by a great over-expansion of credit; and the maintenance of the existing price level might mean a steady source of danger to the banking and commercial system. Then the soundest policy is to reduce wages as prices fall. To the extent that the trouble may be due to special causes such as over-investment in particular directions, this reduction of wages may be unnecessary. But it will probably be found that the recovery from a genuine industrial crisis will be facilitated if a heavy price decline is stimulated by wage reduction.

No wage reductions should be undertaken unless conditions making the case are clearly present. The central authority could avail itself of the advice of the Federal Reserve Board. The lowering of wage rates might be put off until the price decline has reached, say, eight or ten per cent. And the percentage of the reduction of wages might be smaller than the percentage of price decline; say, a three per cent. reduction of wages for every four per cent. reduction in prices. Lastly, when it is judged that the pressure on the financial system is definitely at an end, no further reduction in wages should be ordered even though the price decline continues.[134]

In concluding this discussion one general reflection may be permitted. That is to the effect that no policy of wage settlement will, in itself, suffice to protect the standard of life of the lowest industrial classes during critical industrial times; whether such a time be one of rapidly rising prices of foodstuffs due to poor harvests, or to war, or whether it be a period of industrial panic and precipitate price decline. Much can be done to protect the standard of life of these classes by measures outside of the scope of any policy of wage settlement. The suggestion made by Professor Taussig that it may be possible to regularize the supplies of the principal agricultural products from year to year deserves careful consideration.[135] The best policy, undoubtedly, is one which would enable and encourage the lowest paid industrial classes to accumulate something for hard times.