Chapter Xi--the Regulation of Wage Levels--(_continued_)--

WAGES AND PRICES

Section 1. The scheme of wage relationship must recommend itself as just to the wage earners and the community in general. The ultimate distributive question to be met is the division of the product between profit and wages.--Section 2. Provision for the adjustment of wages to price movements would aid, however, towards reaching distributive goal. A policy of adjustment suggested.--Section 3. The difficulty of maintaining scheme of wage relationship of wages adjusted to price movements. The best method of adjustment a compromise.

1.--In the last chapter the reasons for seeking an ordered scheme of wage relationship in industry were discussed, and some suggestions were made in regard to such a scheme. One essential to its success was pointed out. That is, that under it the distribution of the product of industry should recommend itself as just to the wage earners and the community in general. The possibility of satisfying this requirement remains to be considered.

The ultimate distributive question to be met in any attempt to formulate a policy of wage settlement is the distribution of the product of industry between wages and profits (rent incomes, in the Ricardian sense, being left out of the question). It is entirely conceivable that a policy of wage settlement should be put into practice which would take note only of the facts of this relation. However, there are distinct advantages to be obtained by taking note of an intermediate relation. That is the relation between wages and changes in the price level.

The relation between wages and general price movements has been discussed. It has been seen that movements in the general level of prices affect the outcome of distribution. They occasion changes in the distributive situation; and these changes may be desirable or undesirable--having reference to the distributive result that is sought. Any plan by which such changes as are undesirable are prevented from taking place would contribute, therefore, to the attainment of the aims of the proposed policy; and would be a valuable adjunct to the policy. The conclusions reached in the previous discussion on this subject make up a plan suitable for the purpose. They may now be fitted into the body of these proposals. Then in the following chapter that most difficult problem of wage settlement can be considered--the problem of governing the distribution of the product between profit and wages in order that a just distribution may result.

2.--The results of the discussion in Chapter V concerning a plan for the adjustment of wages to price change may be applied at this point without further comment.

The central authority in its decisions should take note of all changes in the approved price index number since the time when the wage rates which are up for reconsideration were fixed. It should then in its awards adjust these wage rates to price changes in accordance with the following policy. It need hardly be explained that other considerations besides the fact of price change may enter into the award, as the adjustment of wages to price change is merely one part of a larger policy.

The measure of price change by which the central authority should be guided--that is, the approved index number,--should be the movements of the index number of the prices of all important commodities produced within the country; this index number to be so weighted as to give a defined importance (50 per cent. suggested) to the prices of those classes of foodstuffs, clothing, housing accommodations and other commodities, upon which the wage earners spend the larger part of their income. It will be noted that this measure of price change is the same as that used in the adjustment of wages prescribed under the living wage policy. And, as was recommended in the discussion of living wage policy, so it is recommended here, that adjustments should not be undertaken unless the index number of prices has moved at least 5 per cent., and that adjustment should not be more frequent than twice a year.

In regard to the actual policy of adjustment to be pursued in periods of rising and falling prices, here also, save in one important respect, the same policy that was sketched out for living wage adjustments should be followed.

3.--The one point in which it may be advisable to depart from the policy laid down for living wage adjustments is in regard to the amount of wage change that should be undertaken for movements in the price level.

In the earlier discussion it was suggested that wherever wages were adjusted to price changes, the adjustments should be on the basis of equal percentages. If this basis were to be used in adjusting the wages of all other groups of workers it is evident that during periods of changing prices there would be a different set of wage differentials for every position of the price level. And, furthermore, during periods of rising prices, the lowest paid classes of workers--those who could do least to meet the rise in the cost of living by changing their consumption habits--would receive the smallest wage increases.

A great diversity of practice characterized the attempts at adjustment which were made during the period of rapid price increase inaugurated by the war. No two agencies of adjustment used the same basis. Possibly the most widespread practice has been to increase all wage levels by the same absolute amount--which amount has been ordinarily calculated as a percentage of some basic wage (frequently the living wage). The advantages of that method are firstly, its simplicity, and secondly, the fact that if it favors any groups, it favors those whose needs are greatest. Justice Higgins has justified it as follows: "When the Court has increased the basic wage because of abnormal increase of prices due to the war it has not usually increased the secondary wage. It has merely added the old secondary wage, the old margin, to the new basic wage. It is true that the extra commodities which the skilled man usually purchases with his extra wages become almost as indispensable in his social habits, as the commodities purchased by the unskilled man, and have no less increased in price; but the Court has not seen fit to push its principles to the extreme in the abnormal circumstances of the war, and the moderate course taken has been accepted without demur."

Still as a permanent policy, the suitability of this method is not beyond question. The problem to be faced in the choice of method is, after all, this. Given a scheme of wage differentials, which are in accord with certain defined principles, at a given position of the price level, what method of adjustment is best calculated to produce such differentials as will be in accord with these principles, at all positions of the price levels? That sounds like a problem in astronomy. But it is not. It can be more understandably, but less accurately, put by asking, what system of adjustment is best calculated to maintain the same relative position of the various groups of wage earners throughout all price movements?

Under either of the two methods touched upon--that of change by equal percentages, and that of change by the same absolute amount for all groups--the differentials cannot be held in close accord with any such original principles of wage relationship as have been suggested. It cannot be helped. We have come to another point at which the aims of policy can only be imperfectly realized.

It seems to me that the best method would be some sort of compromise between the two alternatives that have been presented. A compromise would make allowance, firstly; for the fact that in times of rising prices, those groups whose wages are lowest cannot meet the rise in the cost of living by changing their consumption habits as easily as can the more fortunately placed groups, and secondly; in times of rising prices, the movements of the wage earners from industry, or from occupation to occupation are governed, within limits, by calculations of the absolute change in the wages paid for different kinds of labor, rather than by calculations of relative change. It nevertheless would prevent the relative position of different grades of labor from changing so radically as to lead to great discontent and possibly to derangements in the distribution of the labor supply.

It can be claimed, in addition, for this compromise method that its results would be in accord with the general trend of changes in the differentials that have occurred in the past in periods of rapid price movement. An inspection of the available material seems to show that in times of rapidly rising prices the relative differentials between the lower grades of wage earners and the upper grades decrease, while the absolute differentials increase--and the reverse in times of rapidly declining prices. They are in accord, for example, with the results obtained by analyzing the course of differentials during the war (1914-1919) in the industries for which wage data was gathered by the National Industrial Conference Board--"Report Wartime Changes in Wages." The data extends over the Metal, Cotton, Wool, Silk, Boot and Shoe, Paper, Rubber and Chemical Manufacturing Industries. If the wage earners are classified into five groups according to their pre-war wages, it is found that the relative wages of the least paid groups (pre-war standards) increased most, and so on in order to the best paid groups, the relative wages of which increased least; the absolute increases, however, are in exactly the opposite order. They are borne out also by Mitchell's studies of price movements in the United States.

In conclusion, it may be said, that no matter which of the above methods is adopted, it should be applied with as much consistency as can be attained. The process of wage adjustment to movements of the price level cannot be left in the field of guess work, where it now rests, without giving rise to much quarreling and discontent.

FOOTNOTES:

H. B. Higgins, "A New Province for Law and Order," Harvard Law Review, Jan., 1919. The Commission acting under the Canadian Industrial Disputes Act, carried this line of reasoning to its further logical consequences by awarding in some cases higher absolute increases to the lowest paid men, and so on up the scale to the highest paid men who received the smallest increase. The large increases granted to the lowest paid men were justified by the Commission as necessary to bring their wages up to a living wage level. See, for example, the Report of the Commission on Disputes in Coal Mining and Other Industries in Nova Scotia. Canadian Labor Gazette, July, 1918. For a similar policy based on the same grounds, see the "Arbitration Award in Certain Packing Industries in the United States." U. S. Monthly Labor Review, May, 1918.

The figures are:

----------------------------------------------------------- (Wage groups) (Group average) 1914, wages Relative increase Absolute increase, earnings per hour of wages earnings per hour ----------------------------------------------------------- .15-.20 208% .193 .20-.25 187% .188 .25-.30 185% .230 .30-.35 184% .266 .35-.40 174% .268 -----------------------------------------------------------

Such figures as these are not, of course, sufficient ground for confident generalization, but they support an imputation that the compromise method does furnish the best solution of the difficulties the problem presents.

See W. C. Mitchell, "Business Cycles," page 134. Also W. C. Mitchell, "History of the Greenbacks," pages 33-37, 123-145.