Selected Papers l No. I

Productivity, Wages,

and Prices

By ALBERT REES

GRADUATE SCHOOL OF BUSlNESS

UNIVERSITY OF CHICAGO

ALBERT REES is Professor of Economics and PublicAffairs and Director of the Industrial Relations Sec-tion, Princeton University. Before coming to Prince-ton he was a member of the economics faculty ofthe University of Chicago from 1948 to 1966.

He has written extensively in the fields of collectivebargaining, wage determination, wage-price rela-tions, price indexes, and the relationship betweenlabor unions and the price system. His book, TheEconomics of Trade Unions, was published by theUniversity of Chicago Press.

In addition to his academic appointment, Mr. Reesis now serving as a member of the New Jersey Pub-lic Employment Relations Commission. He was aFellow of the Center for Advanced Study in theBehavioral Sciences (1959-60), a staff member of theCouncil of Economic Advisers (1954-55), a researchassociate in the National Bureau of Economic Re-search (1953-54), and editor of the Journal of Po-litical Economy (1954-59).

This talk on “Productivity, Wages, and Prices” wasdelivered in Chicago on Wednesday, April 18, 1962,at the final Executive Program Club LuncheonMeeting of the 1961-62 academic year.

Third PrintingMarch 1969

Productivity,

Wages,

and

Prices

I should like to talk this afternoon about therelationship between wages and productivity.I do not think that I need to spend muchtime defending the importance of that topic atthis moment because it figured very promi-nently in the recent steel negotiations.

Perhaps I should begin by defining some ofthe terms that I will be using. Let me startwith wages, which I will use as a kind of short-hand to mean gross average hourly earningsplus fringe benefits. It is the entire compen-sation of the worker and not just the wageelement of it. This becomes increasingly im-portant because a large part of total compen-sation now consists of fringe benefits.

When I talk about productivity, I will meanan old-fashioned and familiar productivityconcept, namely, output per man-hour. Thereare a lot of alternative productivity conceptsthat could be used, and some of them are morerelevant for certain purposes, but, for the pur-pose of discussing wages, output per man-houris as good as any.

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On a previous occasion, when I talked aboutthis subject, John Kendrick, of George Wash-ington University, was with me on the pro-gram. He is more responsible, I suppose, thananyone else for the alternative productivityconcepts that are beginning to be used. I wasvery glad to hear him say then that he, too,thought output per man-hour was the mostrelevant productivity concept for wage deter-mination.

Both average hourly earnings or wages andoutput per man-hour can be measured eitherper hour of actual work or per hour paid for.In certain historical comparisons it makes agreat deal of difference which concept wechoose, because paid vacations, paid sick leave,call-in pay, paid jury duty, and paid holidaysare becoming an increasingly important por-tion of total compensation.

Fortunately for the simplicity of my remarksthis afternoon, it will not matter which ofthese concepts we choose so long as we choosethe same one for wages that we choose forproductivity.

So much for what I might call the clearing-away of the underbrush. Now let us talk aboutwage policies and their relationship to pro-ductivity.

An increase in wages can come from one oftwo places fundamentally. It can come fromincreased production-that is, increased outputper man-hour-or it can come from some re-distribution of the existing output.

Increased output per man-hour is frequent-ly called “labor productivity” simply becauseit has man-hours of work in the denominatorrather than units of capital, or units of all in-puts taken together. But any factor of produc-tion can be responsible for an increase in out-put per man-hour. This increase is not some-thing uniquely attributable to labor.

One may get increased output per man-hourbecause workers are working harder or becauseworkers are more skilled. But one may also getit for totally different reasons. One can get it

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through using a better quality of raw materi-als, if we are thinking about this at the levelof the plant or firm. And, finally, one can getit through technological change. Technologi-cal change, often incorporated into investment,is, of course, the outstanding source of in-creases in output per man-hour.

Therefore, when we talk about rising outputper man-hour, we do not mean in any way toprejudge the issue of claims against, or sharesin, this rising output. Any one of the factorsof production could have a part in causingthis increase, and usually more than one fac-tor will be involved.

Now, if we set aside for a moment the pos-sibility of changing shares; if we assume thatsomehow the shares of labor and capital inouput have been fixed, then a policy tyingwages to output per man-hour has one obviousmerit-and it is this obvious merit that hasmade the policy so popular. For this makes itpossible to have a stable level of prices of finalproducts. If wages go up only in line withproductivity, unit labor costs do not go up,and, therefore, there is no cost-push pressureon prices.

I think it is this very simple relationshipthat has led so many people to suggest weought to have a policy that somehow ties pro-ductivity and wages together.

I am going to take a skeptical view of sucha policy this afternoon, and I might as wellconfess at the outset that I am in a very smallminority of economists by doing so. The greatmajority of the people in my profession feelthat a tie between productivity and wages isa very desirable kind of relationship to have.

There are two or three different ways of ty-ing productivity and wages together. One waywould be to do it industry by industry, or firmby firm, or even plant by plant-to measureoutput per man-hour, let us say, in the steelindustry and let the wages of the steelworkersbe related to output per man-hour in the indus-try. This will produce the result that we desire.There will be no changes in unit cost of labor

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in the industry, and, therefore, no cost pres-sure on prices. What could be nicer? The samepleasing result will occur if we choose the firmor the plant as our unit.

But, when you start to inquire into this, youfind there are some difficulties. Productivitychanges take place very unevenly among in-dustries, among firms, among occupations orsectors of the economy.

The ultimate result of tying wages to pro-ductivity industry by industry or firm by firmwould be to develop tremendous disparitiesbetween wages of people doing similar workin different places. A man might get $1.00 anhour if he were a janitor for the public schoolsand $5.00 an hour if he were a janitor in amissile factory. This would impress us all, ofcourse, as being inequitable. It would not onlyimpress management as being inequitable, par-ticularly the managers of missile factories, itwould also impress the trade unions as beinginequitable because, after all, they believe inequal pay for equal work.

Suppose that we had the policy in, let us say,the television-manufacturing industry of tyingwages to output per man-hour, and supposethat we had commenced this policy in 1946,when the television industry was in its infancy.

If wages had been tied to output per man-hour back in 1946, workers would be gettingfantastic wages in the industry today becauseit is an industry which was growing very rap-idly, which was making rapid technologicalprogress, and in which the output per man-hour was obviously going up much more thanthe average. However, we would also find theprice of television sets much higher now thanit actually is, because the great bulk of thisincrease in output per man-hour has actuallybeen used, not to raise wages, but to lower theprice of the product. That, of course, is as itshould be, and that is the reason for objectingto the policy of tying wages to productivity atthe industry level.

If we have an industry whose output per

man-hour is rising very much more rapidlythan average, and if our goal for the economyas a whole is a stable price level, then, in thatindustry, prices should be falling-not just rel-atively but absolutely. There should be dollars-and-cents price reductions in that kind of in-dustry, and, there have been very substantialones in black-and-white television. This samereasoning will apply to color television. I donot think we want to say that the people whomake color-television sets should have theirwages tied to their productivity because, asvolume expands, their productivity is going togo up very rapidly, and their jobs may actuallybecome simpler rather than more difficult.

Take the other side; take my job. I am ateacher. There is a lot of talk about teachingmachines, but as yet they are not widely used.If we measure productivity as we usually do,then the only measure that we would have forteachers would be something like pupils taughtper year. That seems to be going down, as wefeel a preference for smaller and smaller classes.So, of course, the type of policy we have beendiscussing would mean that we should givedollars-and-cents pay cuts to teachers becausethe number of pupils taught per teacher peryear is falling. It would be very difficult tohold people in the ‘teaching profession underthat kind of a policy.

If there is an industry or occupation that isvaluable to society and that, nevertheless, hasmeasured productivity increases lower thanthe average for the economy as a whole, thenin that industry wages and salaries will haveto go up faster than output per man-hour inorder to hold labor in the industry. Again Ithink that this is as it should be.

Therefore, this seemingly attractive policyof tying wages to productivity at the industry,occupation, or firm level, were it to continuethrough any long period of time, would leadto an intolerable mess-and the policy there-fore has to be rejected.

We very often see arguments in the press, or

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hear discussion between union and manage-ment people, about whether productivity orwages has been going up faster in a particularindustry. In my judgment, ‘this is of no rele-vance at all for wage policy. If somebody at-tempts to say something about wage policythis way, the best thing to do is not to argueabout the figures and say, “Well, you are notmeasuring productivity correctly or you arenot measuring wages correctly,” but to say, in-stead, “It really doesn’t matter and, therefore,why dispute it?”

This brings me to a policy which is not soeasy to dispose of-the policy of tying wages toproductivity at the national level. This policysays that wages in each industry, in each occu-pation, should rise in the same amount asproductivity in the economy as a whole. Thatis a very popular policy these days.

I suppose the start of it, more than anyother one thing, was the United Auto Workers-General Motors agreement of 1948, in whichthere was negotiated (more or less at the insti-gation of the company) the so-called annualimprovement factor. This said that over andabove the increase in the cost of living, whichwas also covered in the contract by an escala-tor clause, the workers at General Motors wereto get an annual real wage increase. The clausehas been continued right down to the presentday. In the current contract it is a stated num-ber of cents per hour, or 21/2 per cent per year,whichever is larger.

Two and a half per cent is just about in themiddle of the range of estimates of the long-term increase in output per man-hour for theeconomy as a whole, and so the figures arerelated. Also, in arguing in favor of this ar-rangement, both the company and the unionhave made the statement that this provisionhas something to do with productivity in-creases.

Similar contract provisions are contained inthe labor agreements in many other collective-bargaining situations. However, in industries

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that do not bargain with the United AutoWorkers, it is much less common to call suchprovisions something like an annual improve-ment factor or to talk about them in terms ofproductivity. They are generally just a built-inwage increase, stated in the contract as SO

many cents per hour, and there is no sort ofintellectual rationale offered for them.

In addition to its use in collective bargain-ing, we find this kind of policy advocated atvery high levels in the federal government.One might say that this has been a non-par-tisan policy in the federal government.

To my knowledge, the first strong plea fortying wage increases to national increases inproductivity was made during the Eisenhoweradministration, when the Council of EconomicAdvisers put a strong plea of this kind in Mr.Eisenhower’s report. You will find it again thisyear in Mr. Kennedy’s economic report, writ-ten, I presume, by his Council of EconomicAdvisers.

When the Joint Economic Committee heldhearings on Mr. Kennedy’s report, two mem-bers of the preceding Republican Council ofEconomic Advisers testified on it, and bothsaid they thought this part of the report wasjust fine. I am going to criticize this policy,one which has had the full approval of boththe Eisenhower and Kennedy administrations,and this leaves me up here all alone.

Why is it that there are weaknesses in thispolicy? Let me come back again to a point inmy earlier remarks. The policy has the effect offreezing labor’s share of income, especially ifyou define wages as I have done, to includefringe benefits. The slices of the pie would al-ways remain exactly the same number of de-grees, if you like, as they were when the policywas first inaugurated.

Now, I have no particular reason to thinkthat labor’s share of income is either too largeor too small right at the moment. On theother hand, I have no reason to think that itis exactly right.

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And I certainly see no reason to assume thatthe same shares will always be appropriate de-spite changes in future conditions, whateverthose future conditions might happen to be.

It is sometimes said that labor’s share ofincome has been stable in the past and that,therefore, it should be stable in the future. Ithink that a careful examination of the his-torical record will show this has not been true.A very good article by Irving Kravis, of theUniversity of Pennsylvania, appeared in Amer-

about two years ago, inwhich he measured labor’s share of income ina variety of ways and showed, in any way hemeasured it, that it had been increasing slowlywith time.

Of course, the position of the union on thisis that labor’s share should continue to in-crease. Indeed, that is what they are in busi-ness to do. And the United Auto Workers,who helped to start the whole thing in thefirst place (if my history is correct), have neveraccepted the implication that labor’s shareshould be frozen. Not only that, but they havenot accepted it in practice. They have notbeen content simply to collect their annualimprovement factor. Every time that the con-tract has been opened for renegotiation, theyhave negotiated improvements in fringe bene-fits. They have negotiated pension plans, theyhave negotiated supplementary unemploymentbenefits, they have negotiated guaranteedwork weeks-and all this over and above theannual improvement factor. Therefore, it isquite clear that labor has not been content tolive by this policy. And, indeed, the manage-ments involved in the automobile, agriculturalimplement, and aircraft industry contracts-those covered by UAW contracts-have agreedto improve the wage-earner’s share of the totalincome generated in those industries.

I will say in defense of the Economic Re-port of the President for January, 1962, thefirst Kennedy report, that it is the first suchreport to point out the income-share implica-

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tions of this policy and to express some con-cern over them. Its answer to this problem isthat any company and union wanting to re-bargain their shares should be free to do SO-

but within the framework of constant prices.Of course, it may be a little bit more difficultto bargain shares that way, but then at leastthe problem has been admitted, and I thinkthis is progress.

The second difficulty is that, if every indus-try and every firm increases its wages in pro-portion to average productivity in the nationas a whole, there is no room for taking intoaccount in the bargaining process, or the wage-determination process, the peculiar circum-stances of the local labor market, of the com-pany or of the plant; and I believe that theseare all relevant to wage determination.

Again, the current report of the Council ofEconomic Advisers (and I distinguish this fromthe President’s report because they are nowtwo separate reports) represents a step forwardon this point. I believe that the person whofirst started talking about this was ProfessorAbba P. Lerner of Michigan State University.

In his original statement, made in the lateforties, he provided for special increases anddecreases in wages to be added to or subtractedfrom the national formula according to thestate of the local labor market. That kind ofthinking has now gotten into the report of theCouncil of Economic Advisers, which statesvery clearly that, where there is a shortage oflabor in the market in an occupation or anindustry, then the wage increase should bemore than the national increase in productiv-ity; where there is surplus of labor in themarket, then it should be less. It also stateswhat may boil down in many cases to aboutthe same thing-that where unions have in thepast been very successful and have had a greatdeal of bargaining power so that wages at theinitial date are very high, future wage in-creases should be less than the average calledfor in the formula. In the reverse situation,

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where unions have been weak and had littlebargaining power and therefore wages are low,the increase should be more than the averagecalled for in the formula.

In its report the Council of Economic Ad-visers was able to do something which workedvery nicely-they were able to state what theeconomists would accept as valid, general prin-ciples and to state them in a form and at atime when they produced the result that wasdesired in the collective-bargaining negotia-tion immediately confronting the Council,namely, that between the steel industry andthe United Steelworkers. There is an excessof labor in the steel industry-there are manypeople unemployed and laid off who have sub-stantial amounts of seniority and whose pros-pects for re-employment at the moment arenot good.

It was through having a very strong unionthat the workers in the steel industry hadmade very substantial gains in the past-muchmore than those of other comparable unions.Therefore, the Council’s policy could certainlybe used to argue that the steelworkers shouldnot get more than the national average in-crease in productivity.

The government, as you know, intervenedrather directly and forcibly in those negotia-tions. Arthur Goldberg, who knew the nego-tiations intimately because he had participatedin them for many years as attorney for theSteelworkers, participated in them this yearfor the first time as the Secretary of Labor. Hewas able to get a settlement that appeared tobe consistent with this formula, and he wasable to get it without a strike. On the face ofit, this was not only a notable achievement,and one that Secretary Goldberg and PresidentKennedy could be proud of, but also onewhich the industry could be proud of.

However, when we start digging deeper, onewonders whether the settlement was all in allconsistent with the formula as modified in thefine print in the back of the report. It is true

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that we have a settlement calling for labor-cost increases smaller than those in previoussteel settlements. From that point of view, it iswhat the President has termed a “non-infla-tionary” settlement. However, the fine print inthe formula called for special consideration ofcircumstances of labor surplus and for specialconsideration of very large past union gains.

The formula taken as a whole could havebeen used to argue either that the steelworkerswere not entitled to any economic improve-ments in their current contract or, if they wereentitled to improvements, that these shouldhave been substantially less than those repre-sented by the average increase in productivityin the economy as a whole. That, of course,was not the result. If we look into it morecarefully, we find that the administration didnot really make the formula stick-not if weread the formula together with the qualifyingclauses and the ramifications.

I am somewhat uneasy about this formula,despite the success of the administration ingetting a steel settlement without a strike andat a relatively modest figure compared to pastsettlements. It is very easy for the governmentto bring pressure to bear on the steel industry.The steel industry has one set of negotiationscovering eleven firms and representing thebulk of employment in the industry. Put pres-sure on this settlement, and you have it made.It is all there in one spot. You know who thepeople are-you can call them all up on thetelephone. It is very amenable to control fromthe city of Washington.

However, our whole economy is not like thesteel industry. We have, for example, thebuilding ‘trades, where there are literally thou-sands of local settlements taking place all overthe country. We have the trucking industryand related industries, represented by thelargest trade union in the United States-theInternational Brotherhood of Teamsters-withthe toughest and most aggressive labor leaderin the United States (now that John L. Lewis

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has mellowed) in the person of James Hoffa.It is not going to be easy to apply these formu-las to James Hoffa or to the building trades.You are not going to know where to find thepoints at which to apply pressure. I suspectthe danger resulting from ‘this, over a periodof time, will be that those industries that areamenable to control from Washington are go-ing to be controlled and a lot of others aregoing to be uncontrolled because you cannotget to them. Therefore, if we go that route, wewill eventually develop an inequitable wagestructure.

If we set up some machinery that wouldcontrol the building trades and similar indus-tries, it would mean peacetime wage-and-salarycontrols-a peacetime counterpart of the WarLabor Board. This would scare me even more,because I think that then you get the wide-spread development of formulas that do nottake into account local circumstances, the mar-ket forces that do get reflected at the bargain-ing table. One of the virtues of our decentral-ized system of wage determination is that itdoes take these into account.

I have talked about the difficulty of apply-ing the formula to the strong unions. It alsohas some disadvantages in connection with theweak unions, especially if the objective of thepolicy is to hold down wages, as I am sure it is.

Where you find a weak union, one that hasunemployment among its membership orwhere, for one reason or another, the membersare reluctant to take a strike, that union isvery often willing to make a settlement thatcalls for no increase or for a very modest one.

I have heard reports originating from peoplein the Federal Mediation and ConciliationService indicating that the formula has madetheir job more difficult, especially when aweak union is involved. Where previouslymanagement and the union might have agreedthat it was not in the cards to have a wageincrease at this particular time in this firm orindustry, the union now says: “Well, the Pres-

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ident says that we are entitled to a wage in-crease equal to the average increase in outputper man-hour in the economy. Are you as theemployer going to tell us that we cannot evenget what the President of the United Statessays we are entitled to?”

This is something that may make collectivebargaining with the weak unions more diffi-cult and more expensive, and it could lead tomore strikes in those situations.

I should like to conclude by touching onsome broader considerations.

I think one has to worry about the wholequestion of how much the government oughtto participate in setting wages and prices, atleast during peacetime, in a free-enterpriseeconomy. We can have a series of decisions,each of which may look sensible and may bevery popular at the time it is made, and, yet,in the long run, the impact of a series of suchdecisions and interventions could be to under-mine the kind of economic system that wehave had, which, I think, most of you willagree has been a pretty good one.

Therefore, I get a little bit scared aboutsome of these interventions. And I get a bitmore scared when they seem to be highly suc-cessful and highly popular than when they areunsuccessful and unpopular.

I think, too, that we want to be very, verycareful about justifying this kind of thing inthe name of the balance of payments. We areperilously close to an economy where we areletting the tail-foreign trade-wag the dog,which is the domestic economy. If our prob-lem is gold outflow, then I do not really thinkwe should be dealing with this through em-ployment policy, through wage policy, throughprice policy. I do not think that it should be-come the determining factor in every economicdecision that needs to be made.

There is nothing sacred about the price ofgold being thirty-five dollars a fine ounce.That is the one economic policy decision thatnobody ever thinks of talking about-the pol-

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icy decision about what the price of goldshould be-something which has been the samefor close to thirty years and which we, there-fore, do not think of as a policy variable. Butit is a policy variable, and maybe we woulddo better to have a free market in gold. Thiswould also permit us to have freer markets insteel, wheat, and some of the other commod-ities and also in labor services.

QUESTION: Can you comment briefly on abil-ity to pay as a criterion for wage increases?

MR. REES: This is an argument used by aunion bargaining with a profitable firm. It hasthe same disadvantage as tying productivityand wages at the level of the enterprise or firmbecause it means that, for the same work,people will be paid more if they are workingfor a profitable employer than for an unprofit-able one. I do not know whether this wouldhelp those of us who work for non-profit insti-tutions.

However, let us take for example the Chi-cago, North Shore, and Milwaukee Railroad,where union members do not believe in abilityto pay as a principle in wage determination.Of course, the unions will tell you that thelaborer is worthy of his hire, whether or notthe employer is making a profit. And, if theemployer cannot make a profit, it should notbe up to the wage-earners to subsidize him;that is his problem. I think that they are right,but then I think that they should also acceptthe opposite side of the proposition-that, ifthe employer, through his imagination or en-ergy, does succeed in making a profit evenwhile paying the going rate of wages, this, inand of itself, is no reason for arguing that thewages should be increased.

QUESTION: I would like to have you com-ment further on employment in relation tothe state of the labor market.

MR. REES: One of the things that has beenlost sight of in wage determination is the state

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of the labor market. In many cases we wouldget a good result and a result that could beagreed upon fairly readily if we raised wageswhen somebody was short of labor of a partic-ular kind or variety. I was recently talking toan employer in a primary metals-manufactur-ing business who indicated that they were ter-ribly short of metallurgical engineers, thatenrolments in engineering schools were down,and that a continuing shortage was expectedhere. This seems to me to be a very good argu-ment for giving metallurgical engineers somepay increases and thus perhaps attracting morepeople into the profession.

On the other hand, take an occupation thatseems to be on its way out, one with largesurpluses of labor. Take, for example, the oc-cupation of locomotive fireman, where a presi-dential commission has recommended that alarge part of these jobs should eventually beabolished. This, I think, should be a goodreason for not paying substantial wage in-creases to locomotive firemen.

I do not say that the market is the onlything that should be taken into consideration,but I do think we tend to lose sight of it, andit ought to be in the picture more than it hasbeen in the recent past.

This is my fundamental objection to theseformulas-they ignore the state of the market.

QUESTION: Do you think that you can dobusiness with unions under this policy?

MR. REES: To some extent you can. That is,unions with large numbers of unemployedmembers are more worried about employmentstability than they are about wage increases.This has even come out in recent steel negotia-tions. It is true that there was an increase inlabor cost in these negotiations, but it took theform of fringe benefits which will tend tospread the work among a larger number ofpeople. Therefore, the consideration of theunion in those negotiations was for job securityand not for higher wages. I think that this will

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be typical of unions that have experienced veryheavy unemployment among their members.

QUESTION: It seems to me that, if you followa policy of raising wages, say, 2 1/2 per cent ayear and within a framework of stable prices,this implies an increase in shares to laborrather than a fixed share.

MR. REES: It would imply increasing sharesonly if the average increase in productivityturned out to be less than 21/2 per cent. If thetwo are equal, then the shares are constant.Now, if that does not appeal to you intuitive-ly, then, through the use of a little algebra,you can work it out. I have worked it out sev-eral times, but I do not think that I will try todo it here because I can never make it comeout unless I am off by myself.

QUESTION: You did not say very much aboutthe shift in labor from one industry to an-other. Do you feel wages or wage increases thatare tied to productivity tend to solidify this?What do you think of retraining programs?

MR. REES: Of course, different rates of wageincrease do create incentives to mobility, andthe productivity wage formulas may interferewith this. As for retraining, we are going tohave more of this both at the company leveland at the national policy level-we are goingto be devoting much more attention to retrain-ing, relocation, and other programs for get-ting labor trained and moved where it isneeded in order to get the job done.

The situation toward which we seem to beheading is one of moderately full employment-reasonably satisfactory levels of employmentfor the economy as a whole. But they are goingto be made up of rather intense shortages incertain occupations and rather disagreeablesurpluses in others.

We have just passed two pieces of legislationwith regard to this-the Area RedevelopmentAct and the Manpower Training Act-in anattempt to solve some of this problem. I think

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these pieces of legislation are going to producea lot of disappointments in the early stages,but I hope that through them we will developexperience which will enable us to do a betterjob of increasing labor mobility.

I might also say that at the level of the com-pany there is likewise some very interestingwork being done, particularly in the meat-packing industry. The United PackinghouseWorkers and Armour set up an automationfund which was used to finance a retrainingprogram for displaced packinghouse workersin Oklahoma City, and here again one learnsthat it is not easy-that there are lots of prob-lems. However, I think it is important to de-velop this kind of experience.

QUESTION: Would you comment on theminimum-wage factor in relation to the dis-cussion you gave us today?

MR. REES: Well, I have not said anythingmuch about the minimum wage because it isrelatively unimportant in our economy. Itaffects a very small number of workers. If oneis going to have a minimum wage, then I seeno particular objection to tying it to a pro-ductivity formula-to saying the minimumought to go up 21/2 per cent per year, provided,of course, that it is not too high to begin with.

Actually, our minimum wage has gone up ina series of jerks or starts rather than by anysmooth formula. If in 1938 we had startedwith a formula approach, it might have beenbetter than the step kind of a pattern that wehave had. However, I think the main problemswith the minimum wage are rather differentones: It may have a very undesirable impacton employment in the heavily affected indus-tries.

The minimum wage is really northern legis-lation by which we in the North have tried toprotect ourselves against competition fromlow-wage industries in the South. If I were asoutherner, this would bother me a great deal;it bothers me a bit even so.

If you look at the roll-call votes in the Con-

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gress on increases in the minimum wage underthe Fair Labor Standards Act, you will find asolid regional alignment-the northerners arealways for increases, whether they are Repub-licans or Democrats, and the southerners, al-most all Democrats, are always against it. How-ever, when it comes to expanding this to localservice industries, such as laundries and dry-cleaning, then the northerners begin to getworried. When the legislation starts to havean impact in their states, they often are not forit. You then begin to see the regional blocsbreaking down.

QUESTION: With regard to changing of jobsand retraining for other work, do you thinkthat it is the desire of the majority of displacedand unemployed workers to go through withsomething like this?

MR. REES: Of course, I can see no reasonwhy a displaced railroad worker or steelworkerwould not want to be in a job in another in-dustry. But, then, in the final analysis, he is atpresent not qualified for some of these jobs,and incentives alone, without qualifications,will not get him to move or relocate. Nobodywants to uproot their family and go lookingfor a job and then discover, when he gets toanother portion of the country, that the em-ployer has no job to offer or will not hire theindividual because he may not have the quali-fications that were being sought.

Some of the older small-scale retraining pro-grams, such as the one at the Technical Insti-tute of Southern Illinois University, have hada rather good record of being able to placepeople who have come out of depressed areas.They train workers from southern Illinoisand place them in St. Louis or Chicago jobmarkets with new skills like those of automo-bile repairmen, appliance and television re-pairmen, or something of this kind. They findjobs quite readily.

QUESTION: Would you comment about the

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attempted effort to increase steel prices in rela-tion to the wage settlement?

MR. REES: I think that the price increaseprobably could have been justified on costgrounds, not so much in terms of the cost ofthe most recent wage settlement but throughthe fact that the industry had absorbed aseries of cost increases over a period of almostfour years without a price increase.

In view of the kind of justification that waspresent there, President Kennedy’s remarksstruck me as being somewhat harsh and in-temperate. Indeed, I was quite surprised bythe tone that he took toward the industry.

It seems to me that, if one has respect forthe free-enterprise system, one should not bequite so severe on people who are trying to dowhat they think is in their best interest asexecutives. On the other hand, there weresome reasons quite apart from government in-tervention why this price increase might nothave been desirable. Here I am thinking of thecompetitive situation in the market. The steelindustry is faced by competition both withother materials like aluminum, plastics, andcement and with the foreign producers of steelwho have been coming up strong with an ex-panded capacity. These foreign producers,with their modern plants, have been increas-ing the shipments of their steel products to thiscountry.

Therefore, I think among the companiesthat did not increase prices, market conditionsor considerations may have been as importantas government pressures.

While I am not unhappy about the finalresults, I think perhaps it is unfortunate thegovernment is getting credit for all of whathappened. The fact that some people withinthe steel industry themselves felt this increasewas not wise is being overlooked more than itshould be.

If we have to choose between two kinds ofgovernment intervention in the industry-the

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sort of determination in Washington ofwhat is or what is not a permissible price in-crease or permissible wage increase and theother which we might call a “restructuring ofthe industry”-I would be much happier witha restructuring of the industry. I think that wemight be better off to break the United StatesSteel Corporation into three or four medium-sized steel companies and leave them alone,rather than to have it stand as a lightning rodfor the wrath of every President.

I wonder if stockholders and management,and even the union, might not be better off,say, if no company in the industry were biggerthan Republic or perhaps Inland is today andif, having achieved this, we leave the managersto do their own collective bargaining andmake their own price determination, ratherthan try to have the Council of Economic Ad-visers do it for them.

The Council of Economic Advisers is an ex-tremely capable group of people, and theyhave an excellent staff; but they are no substi-tute for the wisdom of managers all over thecountry trying to run their own businesses.

QUESTION: From your remarks about UnitedStates Steel, I am not quite clear whether youare recommending that government break upUnited States Steel or that, in the interest ofthe free-enterprise system, United States Steeldecide to break itself up.

MR. REES: The latter strikes me as ratherdifficult to imagine. When we tell Johnny weare going to give him certain punishmentwhich is in his own best interest, we usuallymean that after a time he will realize it is inhis own best interests but that he does notrealize it now. I cannot imagine a voluntarydissolution of the United States Steel Corpora-tion. However, let us take a different case. Letus take Standard Oil, which is one of the fewcompanies that ever has been dissolved underan antitrust proceeding. I do not think it wasdissolved in the most intelligent possible

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fashion perhaps, but, if we were to talk todayto the executives of Standard of Indiana or ofNew Jersey, I think that they might say, fortyor fifty years after the fact, that this possiblywas not a bad idea. However, I do not thinkthat any of the executives of the old StandardOil Company before dissolution would havetaken the same position.

QUESTION: Would you care to comment onwhether you think any of the profit-sharingplans would solve some of the wage-price prob-lems?

MR. REES: I certainly am not opposed toprofit-sharing plans where they are initiatedby a company or where they are initiatedthrough voluntary collective bargaining. Ithink this is one kind of bargain that a unionor company might well find made sense undera particular set of circumstances.

However, I certainly would be opposed toany sort of a law that required profit-sharing-any law that imposed this as a feature of allcollective-bargaining agreements or of all em-ployment relationships. It very often makessense for a company that feels it does not havea great deal of ability to pay at the moment,but does have a lot of potential. If the com-pany gives a wage increase in terms of profit-sharing, perhaps it gets a greater degree of co-operation from its employees in achieving thispotential than it would otherwise.

There are certain desirable incentive aspectsto profit-sharing plans. However, there are alsoother incentive plans that can be used.

Q U E S T I O N: Do you think that one shouldbreak up the United Steelworkers as well asbreaking up United States Steel?

MR. REES: That is a good question. Ifunions were solely economic organizations,then I think I might answer that in theaffirmative. The difficult part of this is that theunion performs many functions, and wage-bargaining is only one of them. It performs

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functions such as grievance settlement, and itis also to some extent a political organization.It represents wage-earners in the politicalscene in Washington in the same way that theNational Association of Manufacturers orUnited States Chamber of Commerce repre-sents business there.

One of the reasons why I have been reluc-tant to advocate any breaking-up of the largenational unions is that, because we have vig-orous and powerful unions, we have wage-earners in this country who believe in our kindof an economy. They feel that their interestsare represented in it. If you contrast theUnited States with any European country, youwill find that almost universally workers thereare opposed to free enterprise on principle-that they all have socialistic or communisticunions of one kind or another.

I think if we took repressive measuresagainst our present kind of labor organiza-tions, the political consequences might well benew labor organizations of the kind, let us say,of the IWW, that are fundamentally opposedto our whole economic and political system.