Wage Rates and Jobs

A day does not pass now without someone in Washington proposing a new inflationary scheme. All of these schemes are based on a common set of assumptions. It is taken for granted that under no conditions can the government permit a recession or even a comparatively mild read­justment. It is taken for granted that it is a "responsibility" of government to maintain "full em­ployment" at all times. It is taken for granted that the government not only has the power to do this, but knows exactly how to do it. It can be done, it is assumed, either by heavy government spending, or heavy deficits, or forcing down in­terest rates, or an increase in the money supply, or all four.

The sole point of dispute among these inflationist groups concerns the exact dose of added spending, tax reductions, or money creation that is necessary to maintain "full employment." The "conservative" inflationists want a comparatively mild dose — just enough to achieve "full employment," but not enough to bring "true" inflation. The lunatic fringe wants to spend money with a steam shovel and to print it on a rotary press.

But all these groups are wrong in their fundamental assumptions. The truth is that neither govern­ment spending nor an increase in the money supply is either a necessary or a sufficient condition for the existence of full employ­ment. What is necessary for full employment and prosperity is a proper relation among the prices of different kinds of goods and a proper balance between costs and prices, particularly between wages and prices. When this balance exists, so that the prospect for profits exists, full employment and maximized production and prosperity will follow. When this balance does not exist, when wage rates are pushed above the marginal productivity of labor, and profit margins are doubtful or disappear, there will be unemploy­ment. The presence or absence of monetary inflation is by itself ir­relevant.

If the proper relationship exists between costs of production and prices, between wage rates and prices, there can be full employ­ment without inflation. And there will be unemployment even with a rampant inflation if wage rates are too high as compared with prices so that profits are distorted or on net balance negative.

What leads to the great contem­porary faith in inflation as the cure-all for unemployment and other economic ills is the fact that under special conditions inflation may raise prices more than wage rates and so restore comparative equilibrium and workable profit margins. After an inflationary boom, there may be a depression accompanied by a collapse of prices. If labor unions then refuse to accept corresponding reductions in wage rates, a money-and-credit inflation, if not accompanied by a further rise in wage rates, may raise prices enough to restore profit margins, production, and employment.

But today, we are given to un­derstand, economic adjustment is never to be made by reducing wage rates, but always by more inflation to raise prices. The unions, going farther, insist that not only must wage rates never be reduced under any circumstances, but that they must be advanced each year, in monetary terms, especially when things get bad, for that will "in­crease purchasing power."

This argument is, of course, wholly fallacious. It confuses wage rates with total wage payments; it confuses a price with an income. Higher wage rates, by excessively raising costs of production and wiping out profit margins, may create unemployment, and so re­duce total labor income. It is in the interest of the whole body of labor itself that equilibrium wage rates should be established that maximize employment and labor income.

But today opinion is confused. One school of thought believes that wage rates ought not to be reduced under any circumstances; another school holds that in fact they will not be reduced because unions will never accept a reduc­tion. That is why, unwilling to face up to the need for curbing the union monopoly powers that our labor laws have conferred in the last generation, so many people can see no way out but the dan­gerous and desperate road of more inflation.    

Newsweek, February 17, 1958

Further Reading

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