1.—We can now proceed to the consideration of the problems of wage settlement which arise out of price movements. First, we will deal with the problems presented by upward price movements. Then subsequently we shall take those questions presented by price movements downward.

The problems presented by upward price movements are two in number. Firstly, is there any reason why wages should be increased during a period of advancing prices? Secondly, if there is reason, on what basis should the increases be arranged?

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.

Nevertheless, it must be admitted that this plan also is not free from disadvantages and difficulties. Some difficulties of interpretation would remain. The selection of the ratio in which wages should be changed with reference to the course of price changes would be wholly a matter of judgment. For due to the changes in the expenses of production and to the changes in the volume of production, it will always be impossible to reason concerning profits merely from the facts of price change. And secondly, since all prices do not change equally, even if wages are increased in accordance with the changes in the index number of all prices, these wage increases might cause price changes in certain directions.

Weighing all the difficulties, it may be that the best method that can be devised would be something in the way of a compromise between the two methods that have been discussed. That is, wage adjustment to a rising price (and to a falling price level—if such adjustment is contemplated) level could be made on the basis of the change in the price index number of all the important commodities produced within the country; but in the making of the index number, the prices of food, rent, and clothing could be given a heavy weight (50 per cent., for example) of the total. Such a compromise would tend to assure, on the one hand, that the wage change did express in a considerable measure the change in the cost of living. And, on the other hand, it would tend to keep wage changes in closer accord with the changes in the total value product of industry than any method based solely on a measurement of the change in the cost of living.

In conclusion, however, it may be remarked that when the prices of the essentials of economic existence are increasing very rapidly, there is no way, under our wage system, by which the welfare of the lowest industrial classes can be effectively protected merely by wage adjustment. When supplies are short, if their distribution is left to the free play of the market, the poorest classes must come off badly.

3. There remain for consideration those questions of wage adjustment which are presented by downward price movements. They are two in number. Firstly, is there any reason why wages should be reduced during a period of declining prices? Secondly, if they should be reduced, on what basis should the reductions be arranged?

In reference to the first question, three different types of situations may be distinguished on the basis of the analysis of the effects of price declines given in the preceding chapter. The first type is that in which the decline in prices is due to some such cause as the progress of invention or the development of the means of transport. In this case the fall of prices is brought about by an increase in the quantity of goods produced, and there is no reason why wages should be decreased. Indeed, there may even be occasion for an increase.

The second case is that in which the decline in prices marks a period of reaction from a previous period of price increase and a tendency to limit production costs and to proceed cautiously, but is not accompanied by much forced liquidation and is not the result of any urgent necessity to reduce bank credit. In short, when the business conditions accompanying the price decline do not warrant apprehensions of a crisis, serious as they may be temporarily. Price declines of this sort may be considerable in extent; they will be gradual rather than violent. They are apt to be characterized by less dispersion than those which are precipitated by crises. In this case also there would seem to be no good reason why wages should be reduced. A decline of prices would be desirable, it is true. The industrial position would be improved thereby and industrial activity would be put upon a sound financial basis. Some contraction of credit is to be desired if, as is assumed in this case, the period of decline was preceded by one of considerable price increase and credit expansion. But these results may be obtained without any reduction in wage rates. The cost of labor will fall without any reduction in wage rates, as the amount of overtime work is lessened, as employment is concentrated upon the more efficient workers, and as workmen put more energy into their jobs in order to hold them. Such times as these usually lead, furthermore, to the introduction of new or forgotten economies, and to improvements in the method of production. Thus it can be concluded in this case that whatever reduction of the price level is required to restore industry to a sound financial basis can be accomplished without reducing wage rates.

The third case is that in which the decline in prices is abrupt—at the beginning at all events—and is precipitated by much forced liquidation of a character disastrous to the enterprises forced to undertake it. In short, when it is brought about by an industrial crisis or when an industrial crisis is actively threatened. In this case the decline is usually preceded by a period of rapidly rising prices which brings about an over-extension of credit and puts heavy pressure upon the banking system. Maladjustments in industry manifest themselves and fear comes to govern all production. The price decline in different industries is apt to vary greatly in extent.

In this case, as in the second, the process of price decline—the state of severe depression—tends to set in motion certain forces which work for recovery. The owners and directors of industry seek for economies. They strive to get greater output from the workers, and generally succeed since a job is more precious. Prime as well as supplementary costs are cut down. And yet if there has been great expansion of credit; if the banking system as a whole shows a very low reserve, and some banks suspend specie payment, a reduction in the wage level is necessarily essential to industrial recovery. This may be so especially, if buying is at a halt. The wage reduction should follow the price reduction. There would appear to be no compelling reason for the wage reduction to be in the same ratio as the price decline, since it is probable that the wage increases will have lagged behind prices in the preceding period. The conditions making the case should be clearly present; competition or control must be active, in order to insure that the reduction of wages really does assist price reduction. These important details will be considered at another point.[66]

Against such a policy of wage reduction some arguments of weight can be brought forward. It may be said that all other branches of outlay will be subjected to a more severe overhauling when there can be no resort to wage reduction. It may also be argued out that the maintenance of wage levels would confer such indirect assistance to recovery as might come from the lessening of the fear that a future fall in wages will make present production unprofitable. The factor of industrial unrest and discontent is apt to be less menacing. Lastly, it may be said that wage reductions might be reflected in the efficiency of the least favorably placed groups of workers.[67]

These objections should be overridden only if it is believed that a decline in the price level greater than that which could be secured without wage reduction must precede industrial recovery. Or that such a decline would, at all events, greatly facilitate the recovery. It must be believed that at the level of prices existing at the outset of the crises, or at a position somewhat but not markedly under that level, the margin of safety in the financial system by virtue of which modern industry is carried on, is too small—the ease with which the unfavorable turn of affairs could produce another crisis too great. Or that consumers will not resume buying until prices drop greatly. Under which circumstances the policy of wage reduction would be as much to the benefit of the wage earners as to the rest of the community.

This case is to be distinguished from the previous one really only by the decided seriousness of the situation it reveals. In this case it is presumed that a decided judgment may be made that the price level must be greatly lowered before business operations can revive and be carried on with confidence in steady markets. In the previous one it is presumed that a decided judgment can be formed to the effect that the shock to business will be satisfactorily gotten over with just that reduction of prices that liquidation and a more careful conducting of business operations will bring about. The difference is, in the last analysis, one of degree.

A price decline that is in reality a movement from a state of depreciated paper money back to a gold standard may be looked upon as a variant of the third case. For it is obvious that if the depreciation is extensive, the decline in the price level necessary to the attainment of the gold basis must also be extensive.

There is a fourth possible case which will be described, but will not be followed up, since it is not applicable to the United States at the present time. It is the case of a country whose chief industries are export industries—the prices of the products of which are determined by world competition. This case is complex and not to be analyzed by a general rule. A few observations may be made. It is conceivable that a situation should arise in which a policy of wage reduction is expedient because the export industries are very gravely threatened by foreign competition. In such a situation it may be argued that any genuine necessity for a reduction of wages would be manifested by the pressure of the banking system, because of the outflow of gold that would occur consequent to a great falling off of exports. But, as we have seen during the war, such a banking situation may be avoided for a number of years by such devices as foreign loans, and the industries in question would decline in the meantime. On the other hand, any policy of general wage reduction could only be undertaken with caution. Situations of the sort described tend to call out the reserve energies of a country. They are always present to a greater or less extent.

So much then in answer to the first question—as to whether there was any reason for wage reduction during periods of declining prices. The second question then presents itself—on what basis should such reductions as are advocated be arranged? On which subject the conclusions reached in the course of discussion of wage adjustment to upward price movement are applicable. These conclusions will be recalled at various points further on in the book.