pensation rose by less than 2 percent. Because some of that gain represented increased employer contributions to social security, real hourly take-home pay for manufacturing workers increased even less for the year as a whole and actually declined between the end of 1965 and the end of 1966. The disparity between the large nominal gains in hourly compensation and the very moderate increase in real compensation per man-hour in 1966 emphasizes again the fact that more cannot be taken out of the economy than is produced. On the average, labor productivity in the private economy can be expected to increase by somewhat over 3 percent a year. Real hourly compensation cannot rise more rapidly than that except at the expense of other incomes. In conditions of strong demand and full utilization of resources, a general increase in money wages in excess of productivity growth is more likely to result in a rise in prices than in a corresponding increase in real wages. When producers pursue pricing policies designed to increase the share of income going to profits or to maintain that share at excessively high levels, this too is likely to be self-defeating. Despite sizable short-run fluctuations due to changing utilization rates, the profit share of income has shown no perceptible trend over the long-run (Chart 11). When profits are unusually high, they encourage workers to demand higher wages. By pushing up the cost of living, the price increases necessary to sustain a high profit share provide further incentive for increased wage demands. Thus, in 1966, price increases were no more successful in raising the profit share than nominal wage increases were in accelerating real wage gains. The share of gross profits in corporate gross income had been rising steadily throughout the expansion. This was of course a normal response to the rise in capacity utilization. The profit share reached a peak in the first quarter of 1966 and then, despite rising prices, began to decline slowly. Within the manufacturing sector, the decline in profits after the first quarter of 1966 resulted in a decline of 11⁄2 percentage points in the profit share of gross manufacturing income. Nonmanufacturing corporations experienced a similar though less pronounced decline in share. The decline in the profit share reversed the upward movement which had continued since 1961. That movement was, as noted earlier, primarily due to the improvement of capacity utilization from the low levels ruling in 1961. In spite of the small decline during 1966, the corporate profit share remained substantially above the post-Korean average, though somewhat lower than in 1955. The relatively minor change in the aggregate share of labor income was accompanied by significant differences in the wage gains in particular sectors. In general, wages increased more rapidly in the nonmanufacturing sectors than in manufacturing. Construction workers made notable gains, as did medical workers from the professional level on down. Other professionals, such as teachers, enjoyed sizable increases in compensation, and trade and service wages continued to advance relatively rapidly. Chart 11 Shares of Gross Corporate Income PERCENT OF GROSS CORPORATE INCOME1/ 1/INCOME ORIGINATING IN BUSINESS PLUS CAPITAL CONSUMPTION ALLOWANCES; BASED ON SEASONALLY ADJUSTED DATA. 2/CORPORATE PROFITS PLUS INVENTORY VALUATION ADJUSTMENT. NOTE.-DATA RELATE TO DOMESTIC ACTIVITY OF NONFINANCIAL CORPORATIONS. Of course, the most dramatic income movement was the 7 percent gain in real income per farm. The relative improvement in farm income was largely a result of the sharp rise in prices of farm products in 1965 and early 1966. By the last quarter of 1966, farm prices had begun to fall and income per farm declined substantially from the peak in the first quarter. However, for 1966 as a whole, real income per farm still showed a gain of more than one-third over 1964. OUTLOOK FOR PRICES While forecasts of price trends are even more hazardous than other forms of economic prediction, there is good ground for anticipating that 1967 will witness progress toward greater price stability. That view is based on the expectation, reviewed in Chapter 1, that the growth of the real GNP in 1967 will not exceed the growth of productive resources. Average wholesale prices in the farm and food sector should be relatively stable, if weather is normal, with advances for some items approximately balanced by reductions for others. However, retail food prices will probably continue to rise, although more slowly than in 1966. The sharp increase in mortgage interest rates, which significantly affected the average level of consumer service prices in 1966, should not be repeated in 1967. Costs for medical care will continue to increase and prices of other labor intensive services may also rise, although less rapidly. Demand pressure on manufacturing prices should be significantly reduced in 1967. With capacity increasing by an estimated 7 percent, there will be a slight reduction in average capacity utilization as well as a better balance among industries. A small decline in manufacturing capacity utilization may have an adverse effect on productivity in some industries, but, in others, such a decline will reduce the need to use obsolete facilities. Moreover, the large amount of new capital coming into use should improve productivity. The movement of employment costs will be affected by a number of conflicting factors. The pressure of demand on wages in unorganized labor markets will be somewhat weaker. Although employment will grow in pace with the growth of the labor force, the balance between the skills in demand and those available will improve. However, there will be continued upward pressure on the compensation of some groups of professional and technical workers. At the other end of the scale, the scheduled increase in minimum wage rates will raise employment costs in some sectors. During 1966, negotiated wage settlements had only a limited influence on the over-all movement of employment costs. In 1967, the average size of negotiated wage increases will tend to increase and the number of workers affected will also be larger. These increases will have a significant influence on the costs of the particular industries involved. However, only about 7 million workers-less than 10 percent of all private employees-will be involved in this year's wage negotiations. Consequently, taken by itself, the direct and immediate effect of higher union wage settlements will be relatively small. However, increases obtained by organized workers tend to pull up the wages of unorganized workers in the same labor market. This process will broaden the impact of union settlements on wages and costs in 1967 and will continue to affect wage costs for a much longer time. The increase in employer contributions for social security in 1967 will be much smaller than in 1966. That will more or less offset other factors tending to push up the rate of increase of hourly employment costs. Unit labor costs will doubtless continue to rise this year. But with greater stability in the farm and food sector, and with less acute demand pressures in product markets, the rise in the general price level in 1967 should be more moderate than in 1966. Chapter 3 Maintaining Price Stability and Reducing THE Unemployment HE OUTPUT AND EMPLOYMENT gains of 1966 brought the U.S. unemployment rate to the lowest point since 1953. But these gains were accompanied by the fastest rise of prices since 1957. Once again, after years of absence, an old set of questions reappeared: (1) How far can unemployment be reduced without inflation? (2) If there is a "trade-off" between lower unemployment and price stability, how do we choose between them? (3) What ways are available to change the terms of such a trade-off; how can we reduce unemployment further and maintain reasonable price stability? An analysis of recent U.S. experience throws some light on these important questions, but it provides no simple answers. The remarkable economic record of the years 1961-65 demonstrates clearly that, when surplus labor and plant capacity abound, fiscal and monetary policies to expand demand can reduce unemployment substantially, and at stable prices. But, in 1966, as unemployment hovered just below 4 percent of the labor force, prices rose at a clearly unacceptable rate. As shown in Chapter 2, some of this rise can be attributed to temporary and nonrecurring factors. Some was the result not of getting to 4 percent unemployment but of getting there too fast. There is good reason to expect that, this year, an expansion of production which will hold unemployment at the present level will be consistent with a substantially smaller price advance. Nevertheless, the experience of 1966 clearly suggests that expanding demand cannot lower the unemployment rate much below the present level without bringing an unacceptable rate of price inUnder present conditions, an over-all unemployment rate close to 4 percent appears to be associated with an approximate balance between supply and demand in most labor markets. A higher level of demand for goods and services would create inflationary pressures in both product and labor markets. crease. If the economy is now in the range of trade-off between falling unemployment and rising prices, then the second question above needs to be faced: how should we rank the advantages of fuller employment against the disadvantages of rising prices? In a meaningful sense, any involuntary unemployment is too much. Ideally, everyone who wants work should be able to find it. To tolerate any unemployment, other than temporary, means subjecting individuals to concentrated hardship, both economic and psychological. On the other hand, it is clear that the overwhelming majority of Americans would also say that any rise of prices is too much. Rising prices create hardships for those on fixed incomes or with savings fixed in money value, and windfalls for others. Moreover, more than a very slow rise of prices can create economic distortions that threaten continued prosperity. And a significant rise in prices would surely worsen the U.S. balance of payments, not only in the short run but for some time to come. Surely, at the present juncture, when the payments balance remains in persistent deficit, inflation could undermine the ability of the United States to carry out its objectives around the world. Faced with a desire for both lower unemployment and price stability, the third question thus becomes the really relevant one: How can the terms of the trade-off between lower unemployment and greater price stability be altered? This chapter does not attempt to deal with all of the answers to this question; but it deals with three. First, the pattern of skills and related attributes of the unemployed can be more closely adapted to the pattern which employers seek; and the functioning of the labor market can be improved so that qualified workers and suitable vacancies can be brought together more expeditiously. Second, all Government policies affecting markets for goods and services can be directed toward the objective of achieving general price stability in an economy with sustained full employment. Third, producers and labor unions can learn to use their market power more responsibly. Public policies to improve the performance of labor and product markets, and private policies of voluntary restraint in price and wage decisions, will together enable the American economy to move gradually in the coming years toward lower unemployment with stable prices. IMPROVING U.S. LABOR MARKETS During each of the three recessions since 1950, unemployment rose sharply, then returned to a rough plateau-at about 3 percent in 1952-53, 4 percent in 1955-57, and 52 percent in 1959-60. There were many who read into this record an ominous and irreversible trend toward ever higher rates of unemployment, even in "prosperity." Profound structural changes in the economy during the 1950's, they argued, had rapidly and radically altered the pattern of the demand for labor. The new pattern was not matched within the ranks of the labor force. This thesis found many supporters in early 1961, when, with an unemployment rate of about 7 percent, a new national administration was deter |