Myth & Fact

Can the U.S. economy achieve reasonably full employment and wage and price stability at the same time? To this hopeful question, Princeton Economist William G. Bowen gives a dourly qualified "no" in his Wage Behavior in the Postwar Period (Princeton University; $3). His conclusion: "There are no simple panaceas or obvious institutional reforms that will make price stability and full employment perfectly compatible," because throughout U.S. history, wage gains have consistently outpaced output-per-man-hour gains, and the gap has widened in the postwar period.

Professor Bowen, in his 137-page survey of wages back to 1900, deflates some widely prevalent notions. For one thing, businessmen often blame--and labor leaders credit--the rise of big unions for the fact that wage scales do not drop in a recession. Not so, says Economist Bowen: "The historical evidence shows that wages were by no means perfectly 'flexible' in the days before strong trade unionism made important inroads."

Few Declines. In the period since 1900, actual money wages have only declined in eight years--four of them in the Depression (1929-32) when industrial unions were born. With or without unions, says Bowen, "the reluctance of wages to fall in spite of considerable unemployment has been a characteristic of wage behavior throughout the 20th century."

If unions cannot take credit for putting a floor under wages during recessions, "detailed investigation of postwar wage behavior also warns against attributing too large a part of recession wage increases to unionization." Wages generally go up, even during depressions, in those highly concentrated industries in which a few big companies are dominant. They are better able to maintain profits and to raise wages in recessions than industries made up of many small businesses where competition is keener and profits narrower.

Steady Rise. As might be expected, Bowen found that unions have their greatest impact on wages in boom times rather than in recessions. Nevertheless, in the 35 years of the relatively weak craft union, prior to the Wagner Act in 1935, constant-dollar wages showed a slightly larger percentage increase (from 53-c- to $1.13 an hour: 114%) than in the 25 years since ($1.13 to $2.20: 95%), when the powerful industrial union has come into its own. Since 1900 the output per man-hour in U.S. manufacturing has risen at an average annual rate of 2%-3% a year. Wage gains over the same 60 years have been well above 2.5% a year, except in the deepest troughs when more than 9% of the nation's nonfarm workers were unemployed. Thus, Bowen concludes that the U.S. wage gains historically have contributed to inflation. And in the postwar period, "wages in general continue to go up faster," warns Bowen, "than output per man-hour" even when unemployment is high. The result is continued inflation, and "no amount of 'faith' in the American economy can alter this harsh fact."

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