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AFL-CIO) is what is the membership of your organization willing to do to make the financial structure of your organization more adequate to your needs. I have advised every one who raised this question that you ... are going to do everything possible to get favorable action on this vital matter. ... In this effort .. you have my fullest support.

Nevertheless, the convention voted down all moves for a per capita increase.

One reason why the dues increase was defeated was the presence in the convention of an opposition faction representing between 40 and 45 percent of the votes. It was led by Jerry Wurf, executive director and treasurer of the New York City District Council 37, the union's largest. Mr. Wurf gave Mr. Zander his first serious opposition for the presidency, and lost, 1,490 to 1,085. The Wurf faction was successful, however, in electing the secretary-treasurer and four board members.

however, was praised at the convention by Robert C. Weaver, Administrator, Housing and Home Finance Agency.)

“Local unions and councils should be strengthened where they exist," Mr. Wurf said in explaining his program. “But the trend in the union is toward centralization. It is important to remember that the employers of our members consist of thousands of political subdivisions and 50 sovereign States. The funds of the union are being used for real estate ventures and internal political purposes, and until such time when union funds are used for organizing and servicing of members, we will continue to oppose an increase in per capita tax."

President Zander has said that control by the COUR group would result in "serious damage to the future of the international. The image we have carefully built up of calm, decent application to the purposes of the organization, and a devotion to democratic ideals, would be seriously hurt."

The COUR group lost on the regional elections and on most other issues. But it held control of at least 2 out of 5 delegates throughout the convention. It won five board seats and what many observers believe to be a Pyrrhic victory on the dues issue. The administration offered successive motions for a 35, 25, 10, and 5 cents per capita increase, and was decisively defeated in all of them. Leaders of both factions recognized the need for more money in the international union; the real issue was by whom and for what purpose would the money be spent.

MORE IMPORTANT than the relative strength of the two factions was the bitterness with which the electioneering and debate were waged. Almost an entire session was taken up in debating and approving the rules of procedure before the convention could get underway. By consent of both factions, the convention was adjourned a day early, with some of its business unfinished.

Ironically, Mr. Zander had induced Mr. Wurf to join the union about a dozen years ago to help organization in New York, and the latter had been a strong Zander supporter. Currently Mr. Wurf spearheads the “Committee on Union Responsibility," a group dedicated to defeating the Zander administration and to effecting constitutional changes which, it claims, would enhance organization and make the union more democratic. To accomplish this, it would elect vice presidents on a regional basis instead of at large, decrease the power of the international to intervene in local affairs, and permit opposition groups to utilize mailing lists of the membership and to enjoy equal election campaign rights in the union press, and assure a secret ballot for all elections. (Because it operates only in governmental jurisdictions, the union is exempt from the provisions of the Landrum-Griffin Act relevant to these matters.)

The COUR contends that dues money should be largely retained by locals and councils for organizing purposes. It criticized President Zander for investing union funds in housing projects. (The union's role in housing developments,

Even with adequate funds and internal harmony the organization of public employees is difficult, and attraction of professional workers is especially difficult. In a book by Leo Kramer on the AFSCME soon to be publisted, the difficulties are well summarized: The union operates among employees "not usually regarded as good union material.” It points out the special problems in a union "which does not control the jobs of its members and which cannot require membership. ..."

Despite all handicaps, the union is taking an active part in the intensive AFL-CIO organization drive in the Los Angeles area, where there are an estimated 260,000 unorganized government workers.

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Some Problems of Wage Policy

EDITOR'S NOTE.The public attention that problems connected with wage policy

have received in recent months lends special significance to this article. In addition to its comprehensive analysis of the many viewpoints on the subject, particular interest will attach to the summary of experience in other countries and the documentation of relevant pronouncements by organization and government officials.

H. M. DOUTY*

The Council's statement, issued in the form of guidelines to wage negotiators, is a reasonably explicit formulation of a national wage policy. This article attempts, first, to indicate the factors underlying the announcement of such a policy; and, second, to present some analysis of the policy in terms of the ends that are sought and of the major institutional factors that may affect its implementation.

Unions, Full Employment, and Wages

IT HAS BECOME COMMONPLACE to argue that pressure on the general level of prices from the side of wages and salaries would be removed if money wage increases, on the average, conformed to the secular gain in national productivity. The

' achievement of such a result would eliminate one of the primary sources of cost inflation. The other major source is represented by profits above the competitive level that reflect the exercise of market power by employers. The fact that this article, except for incidental references, is concerned only with the question of wages and salaries is not intended to suggest that the problem of administered prices is unimportant.

Since wages should perform an allocative function in the labor market, a wage policy geared to the secular increase in productivity does not, in its usual formulation, provide for uniform (percentage) increases throughout industry. On the contrary, as the Council of Economic Advisers suggested most recently in its annual report, wage increases should vary from the average in a downward direction in industries in which labor, assuming reasonably full employment in the economy, is redundant, and in an upward direction in industries in which labor is in short supply. The Council proposed an additional criterion. It suggested that wage increases above the average would be appropriate in industries in which comparative wages are exceptionally low "because the bargaining position of workers has been weak,” and should fall short of the average where wages, reflecting strong bargaining positions, are exceptionally high.

It was conceded, in simpler times, that unions in particular crafts or industries might succeed in raising wages above the "competitive" level. This could be accomplished primarily through restrictions on entry or other regulation of the labor supply. This meant, in turn, that the workers denied access to the unionized trades would seek other employment, thus lowering wages in the nonunion sector. On balance, therefore, the general level of wages would not be affected by union action.3

*Of the Division of Wages and Industrial Relations, Bureau of Labor Statistics.

1 Money wage increases should be understood to include employer expenditures on fringe benefits.

· Economic Report of the President, Transmitted to the Congress January 1962, Together with the Annual Report of the Council of Economic Advisers (1962), pp. 185-190; for excerpts of this section of the report, see Monthly Labor Review, March 1962, pp. 286-287.

* Exceptions were sometimes noted to the proposition that wage increases above market levels would lead to disemployment in the affected trades. Thus, Sidgwick argued that this effect might not result if (1) there was a corresponding increase in efficiency, (2) wage increases simply diminished profits above the competitive level, or (3) wage increases were paid for entirely or mainly by increases in the prices of products consumed principally by the rich. See Henry Sidgwick, The Principles of Political Economy (London, Macmillan & Co., 3d ed., 1901), pp. 352-353.

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By the end of World War II, three factors had changed this perspective. The first was the revolution in economic thought by Keynes and his interpreters, in particular the role assigned to fiscal and monetary policy in maintaining high levels of output and employment. The second was the political acceptance of full employment as a major goal of public policy. The third was the rise of trade union power in many strategic sectors of the economy under the protection, in the United States, of law guaranteeing to workers the right to organize and imposing upon employers the duty to bargain. It was the conjuncture of these developments, which could not fail to have a profound effect on the labor market, that produced present-day concern with wage pressure on the price level.

Indeed, some concepts of full employment, if realized in practice, inevitably would produce cost inflation even if trade unionism were nonexistent. Thus, Beveridge defined full employment to mean that there are “always more vacant jobs than unemployed men, not slightly fewer jobs” or, in different words, that"the labor market should always be a seller's market rather than a buyer's market."'But if the demand for labor is always greater than the supply, wages, and hence prices, will show a continual tendency to rise. As Robbins puts it, “there can be few ways of defining an inflationary situation more precise than a definition which runs in terms of Lord Beveridge's objective." 5

It should be noted that full employment, even in the Beveridgian sense, makes allowance for some unemployment of a seasonal and frictional nature, averaging perhaps 3 percent of the labor force annually. Such unemployment, largely short-term and unavoidable, would not represent deficiency of demand for labor. Taking seasonal and transitional factors into account, the aim of full employment policy might well be equality in the supply of and the demand for labor at current wage rates. This would avoid pressure on the general level of wages from the side of demand. At the same time, however, it would represent a labor market situation in which institutional pressures could be exerted with substantial hope of success. In fact, strongly organized worker groups appear capable of exercising market power under less favorable circumstances.?

The theoreticians of full employment were certainly not unaware of the problem of wages.

Beveridge noted that "there is a real danger that sectional wage bargaining, pursued without regard to its effects on prices, may lead to a vicious spiral of inflation, with money wages chasing prices and without any gain in real wages for the working class as a whole." 8 Hansen remarked that, "If stability is to be achieved along with full employment, wages and prices cannot be left wholly to automatic forces.". Kalecki pointed out that under full employment, “the bargaining power of trade unions will be very strongly enhanced. Thus there may be a spontaneous tendency for money wage rates to increase which leads to a rise in prices and the cost of living; this in turn leads to a secondary rise in wages and so on." 10 Keynes did not deal at any length with the question of wages in relation to full employment, but he clearly recognized the problem. In an article in 1943, he wrote that "some people argue that a capitalist country is doomed to failure (in preserving stability of internal prices) because it will be found impossible in conditions of full employment to prevent a progressive increase of wages. According to this view, severe slumps and recurrent periods of unemployment have been hitherto the only effective means of holding efficiency wages (wages per unit of output) within a reasonably stable range. Whether this is so remains to be

The more conscious we are of this problem, the likelier shall we be to surmount it.” 11

As we shall see at a later point, the nature of the problem was more clearly perceived than its solution.

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The Mechanism of Cost Inflation

Inflation can result from pressure on prices from the side of demand or from the side of costs,

• William H. Beveridge, Full Employment in a Free Society (New York, W. W. Norton & Co., 1945), pp. 18-19.

Lionel Robbins, The Economist in the Twentieth Century (London, Mac millan & Co., 1954), p. 22.

6 Beveridge, op. cit., p. 128.

7 Frank C. Pierson, "Industrial and National Wage Levels Under Big Unionism," Proceedings of the 14th Annual Meeting of the Industrial Relations Research Association, New York, N.Y., Dec. 28-29, 1961 (Madison, The Association, 1962); for excerpts from Pierson's paper, see Monthly Labor Review, March 1962, pp. 264–266.

• Beveridge, op. cit., p. 199.

· Alvin H. Hansen, Economic Policy and Full Employment (New York, McGraw-Hill, 1947), p. 240.

10 M. Kalecki, “Three Ways to Full Employment," in Oxford University, Institute of Statistics, The Economics of Full Employment (Oxford, Basil Blackwell, 1948), pp. 43-44.

11 John Maynard Koynes, “The Objective of International Price Sta. bility,” Economic Journal, June-September 1943, p. 187.

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or it may, in modern industrial societies with democratic institutions, contain a mixture of demand and cost elements. Historically, most inflationary movements appear clearly to have resulted from conditions of excess demand. The great German inflation of 1914-23, described in such vivid detail by Bresciani-Turroni," is a classic example. The rise in the level of prices in the United States during World War II and the immediate postwar years was demand-induced. There are also contemporary examples. It is reported, for instance, that retail prices in Brazil rose by 42 percent during 1961, as the Government printing presses poured forth an endless stream of cruzieros.

Demand inflation is not difficult in principle to understand, although mild doses, as from an investment boom in an industrially advanced country, may not be readily diagnosed. On the other hand, cost inflation (wages or administered prices) presents a greater challenge to analysis. For one thing, it is not ever likely, by itself, to result in a dramatic upsurge of the price level. It tends rather to produce a slow upward movement in prices (which can, however, be cumulatively important), and even this movement may be obscured during some periods by contrary movement in one or more components of the price index (e.g., agricultural products). Moreover, persistent cost inflation must, at some point, find support in demand if output and employment are to be maintained. Thus cost and demand factors tend to become entangled, and the cause of an inflationary episode often becomes obscure and the subject of controversy.

Perhaps the most useful schema for the analysis of inflation is that suggested in a recent article by Professor Machlup.13 He points out, first, that "an inflation of effective demand is a necessary condition not only for a demand-pull inflation of consumer prices but also for a cost-push inflation. Without an expansion of demand, the cost boost would result in less production and less employment, not in a continuing rise in the level of consumer prices.” As the following diagram

INDUCED SUPPORTIVE This is the source (assuming reasonably full omployment of resources) of pure demand inflation. But expansion in demand can also be a derivative of cost increases; that is, the expansion follows and is a consequence of increases in wages or other costs. "Induced” expansion, in Machlup's terminology, would occur, for example, when industrial firms utilize cash reserves or borrow from banks to finance a wage increase granted under union pressure. A "supportive" expansion would occur when the monetary or fiscal authorities act to increase demand in order to reduce or prevent unemployment arising from wage or other cost advances.

The anatomy of cost increases is more complicated. In terms of the following diagram, "responsive" increases (e.g., in wages) are those that are demand-induced; that is, they reflect conditions in the labor market that would have led, in any case, to higher wages.

COST INCREASES

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RESPON- DEFEN

AGGRESSIVE SIVE SIVE At the extreme right of the diagram are cost increases that are "autonomous” in nature; that is, they reflect purely the exercise of market power by unions or employers. Machlup designates certain types of increases as neither strictly responsive nor autonomous, but as "induced” by changes in the economic situation. Thus, a "defensive" wage increase may be sought to maintain real earnings in the face of a rise in the cost of living.

13 Costantino Bresciani-Turroni, The Economics of Inflation (London, Allen & Unwin, 1937).

13 Fritz Machlup, “Another View of Cost-Push and Demand-Pull Inflation," The Restew of Economics and Statistics, May 1960, pp. 125-139.

# For the diagrammatic illustrations, I have drawn on Sir Dennis Robertson, Growth, Wages, and Money (Cambridge University Press, 1961), pp. 33-34.

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Other types of induced increases which, together with those of an “autonomous” nature, he labels "aggressive," represent a response to increased profits or are "imitative" of wage increases secured by other groups of workers.

Machlup's basic model of a "pure” wage-push inflation is stated as follows: "Aggressive increases of wage rates are followed by induced and/or supportive demand expansions, and by responsive increases of material prices and other wage rates."

The Machlup formulation has the merit of suggesting not only the elements and sequence of cost inflation but also the great difficulty in the real world of determining its causation in concrete situations. Nevertheless, given the existence of strong trade unions in strategic sectors of the economy, and government policy calculated to support employment at a high level, the process of wage determination can plainly exert secular pressure on the price level. The result, if not in some way counteracted, may well frustrate such basic goals as high employment and economic growth.15 It has been forcefully pointed out, for example, that:

it may prove to be an arduous task to maintain full employment when the cost-price system has become ossified through group control over wages and prices. As the economy loses its suppleness, the need for compensatory spending rises. Yet additional expenditures, whether 'injected' by the government or generated within the private sector, may be siphoned off in the form of higher incomes for groups already employed, before there is an opportunity to expand production and employment. Whenever the government intervenes to reverse a contractive tendency, it will be haunted by the specter of a forward policy on the part of organized groups. Sequences of income generation may be swallowed up by advances in wages and prices, and the hoped-for beneficial effects may be lost in the cumulative upward movement.16

ices

Measures restricting the cost-push inflation coming from the side of the unions, unlike measures restricting the demand for goods, do not necessarily interfere with the real rate of growth of the economy.” 17 But Professor Kaldor

. fails to tell us how this end can be accomplished. In fact, his only suggestion is for the introduction of the long-term (2-year) contract in Great Britain, on the debatable ground that "the biennial round of wage increases would be bound to be less than twice the annual round." 18

In his pioneering work on full employment, Beveridge, again with British conditions particularly in view, was able only to suggest that the unions attempt to develop a unified wage policy, and that employers and the unions resort to arbitration when they failed to agree.19 As it turned out, compulsory arbitration, but not a unified wage policy, was a feature of British postwar industrial relations.20 In the United States, Hansen's thoughts also turned to arbitration; he argued that, to keep wages in line, "adequate provision for a permanent system of Federal mediation and arbitration of wage disputes is imperative.”21 Unfortunately, a system of arbitration can be a procedure for wage determination, but not in any sense a substitute for a wage policy.

As the postwar period advanced, more and more attention in the United States and elsewhere tended to center on productivity-in the sense of output per man-hour in the economy as a wholeas the substantive key to national policy on wages. Since productivity experience typically varies from one year to another, emphasis has been placed on the long-term trend in man-hour output. Aside from technical problems of productivity

The Search for a Wage Policy

Although the problem of wage pressure on prices has been widely recognized, the answer to the problem, within the context of a full employment policy, has proved elusive. The problem often tends simply to be brushed aside. Thus, Kaldor, writing with particular reference to the British situation, states: "All that is necessary is to recognize that the proper way of dealing with inflation is to damp down, or restrain, the rate of increase in money wages as such, instead of damping down the demand for goods and serv

18 It is a remarkable fact that the United States, up to World War II, had not experienced a long-term upward trend in prices. As Hansen points out, the average level of wholesale prices for the years 1940–46 was about the same as for the decade 1800-09. In only two of the intervening decades did the average level of wholesale prices exceed the level in the terminal periods. See Alvin H. Hansen, Monetary Theory and Fiscal Policy (New York, Ma Graw-Hill, 1949), p. 143. The recent work of Professor George Rogers Taylor and Mrs. Ethel D. Hoover on trends in both wholesale and retail prices confirms this general picture; see, for example, their statements in Hearings on Employment, Groroth, and Price Levels, Joint Economic Committee (86th Cong., ist sess., 1959), part 2, pp. 379-410.

10 James R. Schlesinger, "The Role of Monetary Environment in CostInflation," Southern Economic Journal, July 1957, p. 24.

17 Nicholas Kaldor, "Economic Growth and the Problem of Inflation," Economica, November 1959, p. 296.

18 Ibid., p. 297.
19 Beveridge, op. cit., pp. 200-201.

20 Until March 1, 1959, when the Industrial Disputes Order ceased to be in effect. The revocation of the order was opposed by the unions but supported by the employers.

21 Hansen, op. cit., p. 240.

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