When the publishing firm of Natur och Kultur, in Stockholm, recently brought out a Swedish edition of F. A. Harper’s Why Wages Rise, they asked Dr. Rydenfelt, an economist at the University of Lund, to write a supplement for the book in which he would test its thesis against Swedish experience. This article is extracted therefrom.
Chanticleer in Edmond Rostand’s animal play loudly announces every day at dawn the break of the new day. Shortly after the cock’s crowing, the sun rises. The interesting thing about Chanticleer is that he firmly and completely believes that it is his crowing that makes the sun rise.
In his study, Why Wages Rise, Dr. F. A. Harper examines this Chanticleer attitude displayed by American trade unions. They firmly assert that their deep-toned pressure at the bargaining table, in conflict with employers, forces higher wages — and, consequently, a higher standard of living. But Harper shows convincingly that increased productivity is the basis for the rising wages. He also refutes the claim of the unions that reduction of the working week from 70 to 40 hours is their achievement.
How does Dr. Harper’s thesis agree with Swedish experience concerning wages and productivity?
Some understanding of the cause of growth in the wages of Swedish workers may be gained from the investigations reported in Professor Svennilson’s classical work, Wages in Sweden. He thus describes the development from 1860 to 1930:
"On the other hand, the trend of the wages agrees approximately with the changes in productivity. In other words, wages have developed approximately as if the basis were purely piecework pay at unchanged rates."*
That wages in Sweden, as in the United States, have developed fairly parallel with productivity, i.e., production per employed person, is clearly shown in the diagram.
The Union Claims
In opposition to the above fact, the trade unions have asserted that the wage increases had the effect of a whip on the backs of the employers which forced them to mechanize and modernize faster than they would have done without the increases in wages. In other words, through forcing up wages, the trade unions have been able to stimulate production and progress. Such a claim, however, does not fit in with the facts.
For a long period industry has been dominant in our economic life, and the rise in industrial output has been the strongest force behind our progress. Even if our means of measuring the tempo of the increase are imperfect, the available statistics would indicate that the tempo was faster before World War I and between the two wars than it has been since 1945. This shows that the tempo of the increase slowed instead of accelerated while the trade union movement was growing ever stronger.
The trade unions are, however, free to assert that they have influenced the distribution of what has been produced in favor of the wage earners, in other words, that the latter have gotten a bigger slice of the income cake than they would have received had there been no trade unions. Here they could point to the ratio of property incomes to the total national income, which from the beginning of this century to the end of the thirties sank from about one-third to one-sixth in our country with the share going to the working class increasing proportionately. Experience from other countries indicates that this altered distribution is a natural consequence of progressing industrialization. But even so, this degree of change in the distribution of incomes is of little importance compared with the increase in productivity. Increasing productivity has yielded as much for the worker in five or six years as the entire shift of income from owners to wage earners amounted to over a period of forty years.
The worst of it is, however, that the change in the distribution of income to the advantage of the wage earners as against the owners may have had a very adverse effect on their welfare. To the extent that it caused a decrease in saving — and such an alteration normally has this result in spite of compulsory saving — it means reduced investment, slower progress, and lower real wages. It means a lower standard of living than an unaltered distribution of income would have given.
The groups of workers in our country that have gotten the relatively highest increases in wages during the last fifteen years —domestic servants, agricultural and forestry workers — have been the least organized of the occupational groups.
Wages Are a Price
Lastly, wages are a price and, like all other prices, are determined in the long run by the market situation or supply and demand. According to a prevalent idea, however, the trade unions, similar to other strong cartel organizations, have great possibilities of price-fixing, that is, can force wages higher than the market situation warrants. Even if the trade unions have such power, it is generally much less effective than is commonly believed.
It is obvious that to blame the trade unions for having forced up wages unduly, that is to say, over the "natural" level conditioned by the market situation, is wrong. Wages are a price. If a price is fixed above the market level, the result will be difficulties in selling and a surplus of the product. If wages are set too high, the result will be a superfluity of labor, i.e., unemployment.
During the postwar period the situation has been one of a shortage of labor — overemployment. In spite of the alleged forcing up of wages by the trade unions, the wage level has clearly been below rather than above the market level. That would seem definitely to refute all claims of the ability of the trade unions to force up wages at their own pleasure and independently of the state of the market. The assertion is just as unreasonable as to say that a manufacturer can raise the price of his products more or less at will.
Every businessman knows that there is a limit to both price and wage increases. If that limit is passed, it will inexorably go badly for the business. It is the advancing inflation — from wholly different causes, as we shall soon see — that has created these conditions.
Trade Unions and Inflation
The trade union myth regarding their power to force wages above the proper level in the market has recently brought its own revenge. We have gotten from these claims a "wage inflation theory," according to which the foremost cause of inflation is that trade unions "force wages up at the bargaining table." Much hard criticism — in certain cases even from Social Democratic quarters — has been directed against the trade union movement, and there have been continuous warnings of the need for restraint in wage demands.
Axel Strand, Chairman of the Swedish Confederation of Trade Unions, spoke as follows against the wage inflation theory in the 1955 report of the proceedings of the First House of the Swedish Parliament:
Even government departments appear to have been caught by the systematic propaganda that inflation comes from a bacillus or a virus which finds its actual nourishment and possibility of development in the insatiableness of the workers…. Do not be too sure in drawing the conclusion that inflation arises from the workers’ demands for improvements in wages, a conclusion that is accepted as gospel by large sections of our people. There is much to show that the workers’ demands are nothing more than a reflex of what has already happened in the economic sphere, that is, that enterprises work to a great degree with profit margins that are themselves inflationary….To demand in such circumstances, and to make reference to the balance of our economy in so doing, that the leaders of the trade union movement should make an appeal for restraint to the workers is unreasonable.
In our view Strand is quite right on one point: the wage earners’ demands are nothing more than a reflection of the situation within industry and society as a whole. But he is wrong when he tries to cast the inflation responsibility on the employers and their profits. They too can rightly reply that their profits are nothing but a reflection of the situation within society and business life.
Inflation Follows War
If one studies the history of inflation, he finds that it follows war like a shadow. During wartime the economic activity of the state expands enormously, and by means of printing more bank notes the state is able to requisition a large part of the country’s resources for carrying on war or for rearmament. The extraordinary increase in purchasing power forces up prices and wages which in turn creates a boom with big profits and full employment.
While the state after previous periods of war normally ceased its requisitioning of the resources of society — resulting in a stabilizing of the value of money — after the close of World War II, it continued a policy of expansion, the same as during the war years. The reduced cost of defense has been more than offset by other expenses, especially for so-called welfare schemes.
This "wartime economy in peace" has had exactly the same consequences as the earlier war economy: the demand for goods and services has steadily tended to exceed the supply. Business has enjoyed a boom with big profits which led businessmen to outbid one another for both manpower and goods. Raising wages and prices have been the consequence.
Another cause of inflation during the postwar period was the state’s policy of holding interest levels low and giving tax allowance for interest paid, while the value of money declined, so that borrowers in reality paid nothing at all for their loans, and those who saved got no real compensation for their contributions.
Wage increases are, in our view, exactly like any other price increases, symptoms of more profound changes in the state’s economic policy. Wage earners can seldom obtain for themselves more money than is represented by their contribution to production.
The State and Counterfeiters
We have been able to find only two categories in society which understand the art of "creating money" without producing: the state and counterfeiters. The activity of the latter is, however, of very modest proportions, which cannot be said of the state’s.
Instead of the wage inflation theory, the above analysis would substitute a state inflation theory. According to this theory, the various stages in the inflation illness are as follows:
1. The state’s policy of economic expansion results in an increase in the total purchasing power in relation to supplies of goods and services.
2. The increased purchasing power leaves room for higher profits in undertakings, higher wages for workers, and higher prices for goods.
Higher profits, higher wages, and higher prices are therefore the consequences — the symptoms — of the state policy.
Those who want to describe inflation according to its symptoms can choose between three different theories, all equally fallacious: the profit inflation theory, the wage inflation theory, and the price inflation theory. Which of these theories one chooses usually depends upon one’s place in society. If one belongs to the wage-earning group, he prefers the price or profit inflation theory. If he belongs to the employers’ group, he gladly accepts the wage inflation theory.
If the wage inflation theory were correct, the prevention of inflation would seem hopeless. Employers bid against one another to push wages up. To try to prevent employers from raising wages is unthinkable in a democratic state. On the contrary, it is very much in their interest to raise wages, so that they can get the necessary labor in competition with other employers. In a wage-earning society such as ours, one cannot put an employer in prison for doing something so popular as paying good wages.
It is highly regrettable that so many employers now deem it their patriotic duty, considering the social and economic balance, to try with all their means to prevent rises in wages. When they are nevertheless forced to raise wages, they do it with a bad conscience, instead of gladly, as they should.
The Comedy at the Bargaining Table
There is nothing so practical as a good theory, said a wise man. One can alter the sentence and affirm that there is nothing so impractical as a false theory. In our opinion the very popular wage inflation theory is false. It draws suspicion away from the real villain in the inflation drama and makes us point our guns in the wrong direction.
During the sixteenth and seventeenth centuries the "commedia dell’ arte," an Italian form of drama, was very much in fashion in our part of the world. Characteristic of this drama were such standardized roles as the deceived and ludicrous husband, Pajazzo; the cunning servant, Harlequin; the comic fat man, Pulcinella; the blustering soldier, Il Capitano; the coquettish young woman, Colombine.
The annually recurrent comedy around the bargaining table, where employers and employed play the main parts, reminds one of the "commedia dell’ arte." The employers always play the part of the villain in the piece by appearing to oppose with all their might the workers’ demands for wage increases. The trade union representatives, on the other side of the table, just as consistently play the hero’s role by indefatigably fighting for higher wages and thus a higher standard of living.
In spite of the annual comedy, everything shows that it is actually the competition on the labor market that decides the wage level. If negotiations with the trade unions were discontinued entirely, employers still would be forced by competition with other employers to pay about the same wages as they now do. Why is it that, in such circumstances, the employers agree to take part in the annual comedy around the bargaining table and, in front of the whole country, play the part of villains — reactionaries who are trying to put the brake on progress?
An employer who was also a negotiator once described as follows the negotiations he had just concluded: "The demand for increased wages that the workers’ representatives in the negotiations presented us with at the beginning were so moderate considering the good economic situation that we actually wanted to accept it without more ado. But such a course of action on our part would have been against the rules of the game. It would have made our opponents’ representatives lose face before their members and be disgraced for not having been sensible enough to ask for a sufficiently large increase. They would never have forgiven us such a breach of the rules.
"Anyhow, we loyally followed the rules of the game, that is to say, we labeled their suggestion as completely unreasonable and ruinous. After days and weeks of hard tussle, finished off in due order with all-night sessions, we finally succeeded in haggling a little. The trade union negotiators could return to their members and describe their pitiless and tireless fight night and day. They could take all the credit for the rise in wages — and the increase in the standard of living — which had resulted. It was not enough that we consented to stand in the pillory before the whole country as the villains in the drama; we also lost in the final agreement, as it resulted in a lower wage than we were actually willing to pay. In spite of trying to put right the mistake by individual wage increases over the level of the agreement, we had great difficulty in getting the necessary labor.
"Why do we take part in this apparently silly comedy? Well, that question is very hard to answer. Firstly, we are following the old established rules of conduct, and also it is very important for us to have good relations with the trade union leaders. Today we need in a high degree their cooperation and loyalty, and the price we pay for that is to play a villain’s role. This is just a hypothesis, and I hope our social scientists and sociologists will tackle the study and analysis of this strange comedy around the bargaining table."
It was undeniably an interesting insight given by this employer into an otherwise blacked out, if not tabooed, domain. His account could be completed by a reference to the great social survey, Man in the Industrial Society by T. S. Segerstedt and A. Lundquist (Stockholm 1955). When the persons interviewed were asked what they thought was the basic cause of the improvement in the workers’ conditions during the last 40 to 50 years, by far the most general answer was: the trade union movement (44 per cent). Next came the answer: the workers’ political movements (23 per cent). Only 8 per cent gave the answer: technical progress. It is clear that the trade unions have succeeded very well in their application of the old "commedia dell’ arte."
The Trade Unions and Leisure
As in the U.S.A., the Swedish trade union and labor leaders claim that the shorter working week is largely their achievement. Let us examine this assertion a little more closely.
Judging from the available surveys,* the average working week for industrial workers gradually sank from about 70 hours in 1860 to about 65 in 1880. During that period both the trade union and the political labor movement were practically nonexistent. During the next twenty-year period, 18801900, the working week was further reduced to about 60 hours. During this period the workers’ movement grew in significance, but was still comparatively weak. During the next twenty-year period, 1900-1920, the labor movement gained power rapidly, but the decrease in hours of work continued at about the same pace, the working week sinking to about 55 hours.
In 1920, however, the "natural" development was interrupted. The labor movement, with the help of liberal groups, forced through a law on hours of work, which at one blow reduced the working week in industry to 48 hours.
While the earlier reductions between 1860 and 1920 from about 70 to 55 hours took place with something of the relentlessness of a natural law and quite independently of the contribution of the trade unions, the latter could justifiably claim a considerable part of the credit for the large reduction in 1920.
A "Natural" Development
Did the working week, in spite of the abrupt notch in the curve representing the graph of working hours, continue to sink in the same way as before?
The answer is no ; the development practically stopped. In 1957, the working week in industry, with few exceptions, is still 48 hours. In other words, development ceased for 37 years. It is true that a law has recently been passed according to which the working week will be down to 45 in 1960, but that only means, in fact, that we will then have about the same working week as we apparently would have had with a free, "natural" development.
From the employers’ viewpoint, it would seem to be a matter of indifference whether the employees take out their share of the continuously increasing production as higher wages or shorter hours. If the workers had taken up the demand for a 45-hour week before 1956, it is difficult to see what the employers could have had against the claim, on the assumption, of course, that the rise in wages would have been proportionately less.
An Interlude on Pensions
The same thing holds good regarding pensions for workers. A decent provision for workers in their old age is a matter that most employers certainly have very much at heart. If the employers could have had a say in the matter, it is very likely that they would have been willing to put aside a considerably larger part of the proceeds of industry for pensions for the workers — and a correspondingly smaller part for wages. A pension is rightly regarded as deferred pay. But as the workers have hitherto clearly preferred higher wages to larger pensions, the employers have given in on that point. From the purely economic aspect, it has not mattered much whether the employees accepted their share of the increased proceeds in the form of higher wages, higher pensions, or more leisure time. The employer was nevertheless made to stand in the corner and charged before the whole nation with being stubbornly opposed, not only to higher wages, but also to higher pensions, and more leisure time.
It is clear that the standard of living of the workers is decided by the productivity and their share in the proceeds of production. It is also clear that this share is decided by the competition of the employers for labor in the market.
The conclusion must be that the standard of living of the workers would be about the same even if there had been no trade union movement. The division between wages, leisure time, and pensions might have been different, but the total amount would by and large have been the same.
¤Svennilson, Ingvar. Wages in Sweden, 1860-1930, Part Two. Stockholm Economic Studies of
*See, for example, The Industrial Problem, 1950, published by the Institute for Economic Research in Industry, and the Official Investigation Concerning Shorter Hours of Work, SOU, 1956:20.