FOOTNOTES:

FOOTNOTES:[12]H. Clay, "Economics for the General Reader" (English edition), page 333.[13]See A. C. Pigou, "Wealth and Welfare," page 20.[14]A. Marshall, "Principles of Economics" (7th edition), page 138.[15]See pages 56-8, this chapter.[16]Address of Mr. Harrington Emerson at the National Conference of the "Society of Industrial Engineers and Western Efficiency Society" on labor problems.[17]G. D. H. Cole, "The Payment of Wages," page 67.[18]Final Report of the Committee on Industrial Relations (1912-16). Report signed by Commissioners Manly, Walsh, Lennon, O'Connell, and Garrettson—the section on scientific management stated to be based on an investigation conducted by Frey, Valentine, and Hoxie, page 128, Vol. I.[19]Ibid., Vol. I, pages 131-2.[20]R. F. Hoxie, "Trade Unionism in the United States," page 162.[21]LondonTimes, Feb. 7, 1920.[22]G. D. H. Cole, "Payment of Wages," page 30. Discussion of the speeding up question. The best analysis of the problem created by the introduction of new and simplifying machine processes in skilled trades is to be found in a volume called "Labor, Finance, and the War," Report of the Committee of Investigation (1917), The Econ. Section, British Assn. Advancement of Science. In the same volume there is a careful analysis of the whole question of limitation of output. See also the chapter called "Unemployment" in Lord Askwith's "Industrial Problems and Disputes."[23]See A. L. Bowley, "Distribution of Income in the United Kingdom Before the War."[24]Report of the Commission on the "Decline of Agricultural Population" (Great Britain), 1906, page 14, CD 3273.[25]H. Clay, "Economics for the General Reader," pages 237-38. See also Essay by the same author entitled, "The War and the Status of the Wage Earner" in a volume entitled, "The Industrial Outlook" for a more extensive analysis of the part played by the standard of life in fixing wages.[26]A. Marshall, "Principles of Economics" (7th edition), page 642.[27]Adam Smith, "Wealth of Nations" (Cannan's Ed.), Book I, pages 101-2.[28]F. W. Taussig, "Principles of Economics" (Revised Edition), Vol. II, page 124.[29]The phrase "each and all of the labor groups" is used to indicate that the level of earnings of all the labor groups is determined largely by forces which affect them greatly (those examined in this chapter), and yet that the determination of the level of earnings of each group is something of a separate process—due to the fact that the suppositions underlying the idea of a general rate of wages are not fulfilled.

[12]H. Clay, "Economics for the General Reader" (English edition), page 333.

[13]See A. C. Pigou, "Wealth and Welfare," page 20.

[14]A. Marshall, "Principles of Economics" (7th edition), page 138.

[15]See pages 56-8, this chapter.

[16]Address of Mr. Harrington Emerson at the National Conference of the "Society of Industrial Engineers and Western Efficiency Society" on labor problems.

[17]G. D. H. Cole, "The Payment of Wages," page 67.

[18]Final Report of the Committee on Industrial Relations (1912-16). Report signed by Commissioners Manly, Walsh, Lennon, O'Connell, and Garrettson—the section on scientific management stated to be based on an investigation conducted by Frey, Valentine, and Hoxie, page 128, Vol. I.

[19]Ibid., Vol. I, pages 131-2.

[20]R. F. Hoxie, "Trade Unionism in the United States," page 162.

[21]LondonTimes, Feb. 7, 1920.

[22]G. D. H. Cole, "Payment of Wages," page 30. Discussion of the speeding up question. The best analysis of the problem created by the introduction of new and simplifying machine processes in skilled trades is to be found in a volume called "Labor, Finance, and the War," Report of the Committee of Investigation (1917), The Econ. Section, British Assn. Advancement of Science. In the same volume there is a careful analysis of the whole question of limitation of output. See also the chapter called "Unemployment" in Lord Askwith's "Industrial Problems and Disputes."

[23]See A. L. Bowley, "Distribution of Income in the United Kingdom Before the War."

[24]Report of the Commission on the "Decline of Agricultural Population" (Great Britain), 1906, page 14, CD 3273.

[25]H. Clay, "Economics for the General Reader," pages 237-38. See also Essay by the same author entitled, "The War and the Status of the Wage Earner" in a volume entitled, "The Industrial Outlook" for a more extensive analysis of the part played by the standard of life in fixing wages.

[26]A. Marshall, "Principles of Economics" (7th edition), page 642.

[27]Adam Smith, "Wealth of Nations" (Cannan's Ed.), Book I, pages 101-2.

[28]F. W. Taussig, "Principles of Economics" (Revised Edition), Vol. II, page 124.

[29]The phrase "each and all of the labor groups" is used to indicate that the level of earnings of all the labor groups is determined largely by forces which affect them greatly (those examined in this chapter), and yet that the determination of the level of earnings of each group is something of a separate process—due to the fact that the suppositions underlying the idea of a general rate of wages are not fulfilled.

Section 1. We have next to examine the causes of formation of relatively separate groups of wage earners.—Section 2. What is meant by a "relatively separate group"?—Section 3. The causes of the existence of these groups in the United States to-day. Inequality of natural ability; inequality of opportunity; artificial barriers. All these contradictory to assumptions behind theory of general rate of wages.—Section 4. Trade unions another factor in the formation of relatively separate groups. Indirect effects in opposite direction.—Section 5. Each of these groups has a relatively independent economic career. There are a series of wage levels, all of which are governed to a considerable extent by the same forces.—Section 6. The way in which the relative plenty or scarcity of each kind or group of labor affects its wages. Other forces play a part also.—Section 7. The nature of wage "differentials."

1.—We have next, therefore, to look at the causes which lead to the maintenance of relatively separate groups of wage earners, and then at the forces which govern their relative levels of earnings.

2.—First of all let us make clear some of the characteristics of the relatively separate groups of wage earners in the United States to-day. They vary greatly both in size and in kind. They areapt, however, to be conceived as similar because of the force of logic. It is not entirely satisfactory to classify them either as horizontal groups (having reference to their position in the scale of skill, or of society) or as vertical groups (having reference to their separation by industries). For the position of certain groups may be due both to the influence of those forces which bring about horizontal divisions, and of those which bring about vertical divisions. Such, for example, is the position of a craft which requires a measure of education and training which those who are placed by circumstances at the bottom of the industrial scale cannot easily get, and which besides it is difficult to enter because of trade union regulations.

Marshall has described the situation in England in terms that roughly fit the facts in the United States also. He suggests that the different occupations may be thought of "as resembling a long flight of steps of unequal breadth, some of them being so broad as to act as landing stages." "Or even better still," he writes, "we may picture to ourselves two flights of stairs, one representing the 'hard-handed industries' and the other 'the soft-handed industries'; because the vertical division between the two is in fact as broad and as clearly marked as the horizontal between any two grades."[30]

The position of any relatively separate group is usually to be accounted for only as the result of many forces, each of which has some effect upon the rest. For example, barriers of custom or on vested right may limit the field of employment for women. This would tend to establish one level of earnings for women, and a different one for men. As a result women might find it harder to get the training necessary to enable them to compete with men. And so the interaction of causes would proceed.

So much in the way of preliminary remark upon the characteristics of the relatively separate groups of wage earners in the United States to-day.

3.—Among the causes which account for the existence of these groups there are some which if they stood alone would merely modify the applicability of the idea of a general rate of wages.

Such, for example, is the fact that the wage earner's knowledge of existing opportunities for employment is limited. Considerable discrepancies of wages for the same work may arise; although the facilities for the spread of information regarding wages has greatly improved, especially in the more skilled trades. Then there are, also, various expenses of removal, both material and psychological, such as are involved in the shifting of a family from the city in which it has longbeen established.[31]There are, also, the handicaps and hazards attached to the learning of a new job or trade even though the new job holds out hopes of considerably better wages than the old one. All such facts as these—for but a few examples have been chosen from among many—however, are reconcilable with the theory of a general rate of wages. They are but minor qualifications of a broad general principle. Other facts challenge that theory more seriously. They really do point to the existence of relatively separate groups of wage earners, each with an economic career somewhat independently determined.

First among them must be put the inequality of natural ability possessed by individuals, and the consequent fact that the numbers who possess the inborn capacity required for certain kinds of work is relatively small. It results from thislimitation of the higher forms of natural ability, that the wages received for the more skilled forms of labor may be considerably higher than for the less skilled forms without such an increase of numbers in the more skilled groups as would bring down their wages to the general level. The competition for employment on the tasks demanding skill is limited; separate groups develop. It is impossible to tell the extent to which differences in inborn capacity would lead to the formation of relatively separate groups of labor, if all the other assumptions underlying the theory of a general rate of wages were fulfilled in fact. Prof. Taussig has expressed this well. "What would be the differences in wages, and to how great an extent would groups and classes persist, if all had the same opportunities, and if choice of occupation were in so far perfectly free? Would wages then differ only so far as they might be affected by attractiveness, risk, and other causes of equalizing variations? Would coarse manual labor, for instance, then receive a reward nearly as high as any other labor, nay, conceivably (since the work is dirty and disagreeable) higher than any other? Would the soft-handed occupations lose entirely the advantages in pay which they now commonly have? The answer must depend on our view as to the limitation of natural abilities. It is clear that some gifted individuals—a few men of science and letters, inventors and engineers, business men and lawyers, physicians and surgeons—wouldtower above their fellows, and would obtain in a competitive society unusual rewards. But would physicians as a class secure higher rewards than mechanics as a class? They would do so only if the faculties which a capable physician must possess are found among mankind in a limited degree. And mechanics, in turn, would receive wages higher than those of day laborers only if it proved that but a limited number possessed the qualities needed. On this crucial point, to repeat, we are unable to pronounce with certainty. What are the relative effects of nature and of nurture in bringing about the phenomena of social stratification, we cannot say."[32]

Next among the facts which account for the existence of relatively separate groups of wage earners are those which are usually summed up under the phrase inequality of opportunity. Equality of opportunity in the way of education and training, and in the way of healthy and strengthening environment would have to be assured before the theory of a general rate of wages could possibly apply. This equality of opportunity is not realized in the United States to-day.

The United States has been the scene of continuous and heavy immigration. The mass of this immigration entered into the field of unskilled labor. The great majority of these workers because of the partly unavoidable handicap of theirstrangeness, and their ignorance of American life, and because of their poor education, did not have equal chances with the older inhabitants to rise in the industrial scale. They could not possibly make the same use of the common opportunities—even if their natural ability were on a par with those of the older inhabitants. Furthermore, the rapid growth of our great cities and the accompanying social changes, the growth in the size of the average industrial enterprise, and the progress of standardization have all lessened equality of opportunity. The chances of the children born in the lowest industrial groups to discover and fairly test their natural abilities have declined in relation to the chances of the children more fortunately born. These conditions have certainly checked the working out of those forces on which the theory of a general rate of wages rests.

Thirdly, there is the fact that certain forms of work on which youthful labor is employed, give no preparation and training for the further stages of life and work; and these blind alley employments are filled by children born in the lowest industrial groups.

Then there are the barriers of different kinds to free movement throughout all parts of the field of employment. There are the barriers of sex which have added to the crowding of certain occupations and industrial grades. There are the barriers of race and religion, which have affected the flow of labor between different industries.Lastly, there is the barrier of color, which has prevented the negroes from developing their natural ability. These barriers may be well justified, in part or in whole, by other considerations. That question need not be considered here. But they certainly contribute to the formation of relatively separate groups of wage earners, with different levels of earnings.

4.—The existence and activities of labor unions are still another factor in the formation of relatively separate groups. In many cases labor organization tends to follow closely the lines of separation or unity established by the other causes of group separation or unity. There is often a tendency for a single union to include within its limits the whole of a group within which all the conditions underlying the idea of a general rate of wages are well fulfilled; or for various unions to merge or act together, if these conditions are well fulfilled between them. G. D. H. Cole has given a case in point. "Clearly the ease with which an industrial union can come into being depends upon the sharpness of the distinction between the skilled and unskilled in the industry concerned. Thus in the mining and textile industries, as we have already noted, there is no very sharp distinction between the two classes of workers. In mining, the boy who enters the pit has every chance of passing before many years have gone by into the ranks of the coal getters, who form theskilled section of the mining community. There is no sharp division or cleavage of interest between the main sections of the mining community. Promotion runs easily from one grade to another, and therefore, it is easier to realize a form of combination in which all the various sections are grouped together in a single industrial organization."[33]...

This tendency, however, has not been perfectly realized by any means. It often happens that the scope of a labor union will coincide with the underlying facts of unity at one time, but not permanently. The limits of particular trade unions have sometimes been set by an accident of time or place; by some episode in union history. The internal politics of the union movement has been the decisive factor in still other instances. Furthermore, industrial conditions are constantly changing and creating new lines of group separation or unity, which may vary from the lines of the existing labor unions.

Labor organization affects the formation of relatively separate groups of wage earners both directly and indirectly. First as to its direct influence. A labor union is a combination of a number of individuals, formed with the intention of advancing the material welfare of the group and for such wider purposes as the group may agree upon. The chief peaceful method of unionism is collective bargaining; its chief combativemethod is the strike. Labor unionism is a factor in the formation of relatively separate groups of wage earners, because each autonomous, or practically autonomous, trade union is a point of pressure upon the distributive mechanism. Each trade union strives to turn the balance of distribution in its own direction. This it does in a variety of ways.

It may by its wage demands test out the nature of the demand for the products of its labor. It strives to force the price of these products up to the point which seems to promise the greatest wage income for the group. It may by its pressure on the employer bring about a revision of productive methods. It seeks by its strength to secure that portion of the product which, in its view, goes to the strongest contender for it. Unions, indeed, sometimes strive to restrict the flow of labor into their craft or industry by deliberate regulation or silent obstruction. Such instances are less important than formerly in all probability. On occasion unions may even play a part in determining the field of employment for their members. Thus G. D. H. Cole points out that in England the trade unions do not recognize "differences between skilled and less skilled workers as demarcation disputes, and do not recognize the right of unskilled workers to raise such cases against skilled unions. In fact, the skilled unions virtually claim the right to do such work as they think fit, and so far as they can enforce their claim,to exclude the less skilled where they think fit."[34]Again unionism may indirectly through its wage policy cause a slowing up of recruiting of new men into the craft or industry. In short, by every means at its command, a union strives to assert the importance of its group as against other interests. Thus, in respect to the activities just described, unionism must be included among the influences which lead to the formation and maintenance of relatively separate groups of wage earners.

On the other hand, trade unionism in many indirect ways tends to have an effect in the opposite direction. By a constant adherence to certain broad policies, the trade union movement may contribute much to a realization of the conditions on which the idea of a general rate of wages is based. Such, for example, is the emphasis played by the trade union movement upon free and compulsory education, and the raising of the age of entry into industry. Such, also, is its advocacy of social legislation which is aimed to give more nearly equal opportunity to the lowest grades of industrial workers. Or, to take a third example, such is the result of the aid given by the skilled trade unions to the unskilled workers in their efforts to organize. Unionism works against the formation of relatively separate groups of wage earners to the extent that its activities contribute towards the achievement of equality of opportunityfor all wage earners, and to the extent that the strong groups come to the assistance of the weaker.

5.—The main cause of the formation of relatively separate groups of wage earners, with different, though closely related levels of earnings have now been considered. As a result of these influences, it must be concluded that the determination of the wage level of each of the various groups of wage earners is a sufficiently independent process to make it necessary to account for it as such. The various groups of wage earners have relatively separate economic careers so to speak. The economic fortune of each group is not settled merely as part of one general process, though the economic fortunes of all are intimately connected. The wage situation is not to be explained as consisting of one basic level of wages with a series of equalizing differences; but rather as consisting of a series of wage levels, all of which are governed to a considerable extent by the same forces or conditions.[35]

6.—We can now pass on the final question which confronts us. How are the differences betweenthe level of earnings of the relatively separate groups of wage earners determined?

The factors which determine the relative levels of earnings of each of the different groups may be put into two sets. First, those factors in regard to which each group stands alone and separate. Second, those which arise out of the dealings between the several groups.

"The relative plenty or scarcity of the different kinds of labor" falls in the first set. It will be remembered that this was among the three forces which, earlier in the book, were stated to be among the most constant and important in the determination of wages. The processes by and through which the facts of relative plenty or scarcity work out their effect in the distributive result have already been examined. If the numbers in any group of wage earners are high relative to the uses in which the employment of the members of that group results in a considerable addition to the product of market values, the wages of that group will be low, and vice versa. The need of the productive system for any kind of labor, relative to the supply available to fill that need is an important factor in determining the reward paid for that labor.

Furthermore, the statements in regard to the interactions to which the action of the factor of relative plenty or scarcity was subject, apply with equal force to the problem under discussion. Every human quality plays its part in the actualprocesses and negotiations by which the wages of the various groups of wage earners are settled. The outcome depends on many forces, some stable, some shifting and difficult to trace. Among those forces labor unionism, as the assertion of group economic power, holds a significant place.

In one respect, indeed, the previous analysis does not apply accurately to the question of different, though closely related wage levels. It is probable that the opportunities for the substitution of one type or group of labor for another type or group are more extensive and numerous than the opportunities for the substitution of one agent of production for another. And this fact limits the differences of wage levels that may arise between different kinds or groups of labor. For substitution of one type or group of labor for another is one of the ways in which changes in the relative plenty or scarcity of the different types or groups are brought about.

So much for the first set of forces—those in regard to which each group stands alone. The second set—those which arise out of the relationships between the various groups—remains for consideration.

Among these is the influence of customary wage relationships upon the course of wage movements within an industry, and to a lesser extent throughout industry. Because of the existence of vague customary relationships, wage movements affecting some groups or classes of labor are likely tostimulate similar movements among other groups; though it is plain that the efforts of different groups may not meet with equal success. This is well exemplified in the case of railway labor, of which Mr. Stockett has written, "Indeed there is every likelihood that the existence of a powerfully organized and highly paid group of labor in any industry—such as the engineers and conductors in railway transportation—far from being detrimental, may in the long run, be beneficial to the interests of the unorganized and low paid workmen. There is a tendency among the employees to keep a close watch on the wages paid to other groups of their fellow workmen, and the differential between their wage and that of some other grade of employment is jealously guarded. Thus on the railways, wage increases usually advance in cycles, an advance to engineers being followed at a close interval by an equivalent advance to firemen, conductors and trainmen. Existing differentials are more jealously maintained among the train service employees than among other railway workers, but that the latter do aim to maintain their relative level below the skilled groups is evidenced by the reference in arbitration proceedings to the advances made by the train service employees and by their claims to proportionate advances. Thus an increase in the wages of a highly paid group of employees, on account of this tendency to maintain existing differentials tends to put in motion a cycle of wage advances extendingto all grades of labor."[36]Public opinion and public agencies of wage settlement have in the past been inclined to give support to the idea of the maintenance of customary relationships, even when the justification was flimsy.

Far more important is the factor of mutual aid between groups. For example, in pursuance of some general object skilled groups of labor have given support to minimum wage legislation for unskilled female labor; or again, such instances as the occurrence after the panic of 1907, when various organized groups of wage earners made common cause to resist wage reductions even for unskilled and unorganized labor. Such mutual aid plays its part in determining the wage levels of the different groups of wage earners.

This concludes the explanation of the forces which govern the relative wage levels of the separate groups or classes of labor. The actually existing differences of earnings between different groups of labor can only be explained by the combined influence of all the forces discussed.

7.—Differences in the levels of earnings of various groups of wage earners have been called "differentials." An effort has been made to explain their causes. Several practical conclusions, in regardto them, may be deduced from the preceding discussion.

Firstly, that these differentials (which may be measured by the differences between the average earnings of various occupations) result from, and in that sense represent, a large variety of actual forces; some of which can only be changed slowly and with much effort, as, for example, the relative plenty of the lowest grades of labor. As complete a knowledge as is obtainable of the various forces which produce these differentials is absolutely necessary to any project of wage regulation.

Secondly, although they represent a large variety of actual forces, it is misleading to apply such adjectives as "normal" or "natural" to them. For such adjectives inevitably suggest that the condition to which they are applied corresponds to a set of facts from which divergence can be only temporary, and is probably accidental. That, however, is not true in regard to the wage differentials which exist at any given time.

Thus, and thirdly, in any project of wage regulation, existing wage differentials can neither be accepted nor rejected blindly. A policy of wage settlement for industrial peace need not be based upon the acceptance and maintenance of all existing differentials. On the other hand, whatever revisions are undertaken should rest upon a knowledge of the forces which have established existing differentials. The policy of the South Australian Industrial Court, as expressed by itsPresident, would seem to be a practical application of this view. To quote from one of his decisions: "Preëxisting or customary marginal differences are followed by this court as a prima facie rule, but the rule is only prima facie, and is subject to revision in the light of argument and evidence."[37]

FOOTNOTES:[30]A. Marshall, "Principles of Economics" (7th Edition), page 218.[31]For an interesting account—from the point of view of the visiting observer—of the mobility of American Labor, see the Board of Trade (Great Britain) investigation: "Working Class Rents, etc., in American Towns" (1911). CD 5609, Pt. V. "... As a consequence partly of the comparatively rapid industrial development of the country and partly of the scope of its resources, and acting in response to the opportunities which are offered, either in centers where urban industries may be more rapidly expanding, in agriculture or in mining the mobility of labor is unusually great. In fields of employment that are well known as centers towards which great numbers of foreigners drift; in which much of the labor is unskilled; in which work is especially laborious as in the iron and steel works, or especially intermittent as at the stock yards and packing houses of Chicago, the constantly changing stream of labor that passes through is a conspicuous factor of the situation. But in general, there is an unusual degree of movement and restless change."[32]F. W. Taussig, "Principles of Economics" (Revised Edition), Vol. II, page 142.[33]G. D. H. Cole, "Introduction to Trade Unionism," page 11.[34]G. D. H. Cole, "Introduction to Trade Unionism," page 61.[35]For an eloquent and incisive discussion of this whole subject, based, of course, on the facts of his own time, see the chapter in J. S. Mill, "Principles of Political Economy," entitled "Of the differences of wages in different employments." Book II, Chapter XIV, concludes: "Consequently the wages of each class have hitherto been regulated by the increase of its own population rather than of the general population of the country." Page 393. (Edition Ashley.)[36]J. N. Stockett, "Arbitral Determination of Railway Wages," pages 165-6. See also account in Lord Askwith's "Industrial Problems and Disputes" of the influence of customary differentials upon wage movements during the war, pp. 400-26.[37]Page 232, Vol. II (1918-19), S. Aust. Ind. Reports, The Furniture Trades Case.

[30]A. Marshall, "Principles of Economics" (7th Edition), page 218.

[31]For an interesting account—from the point of view of the visiting observer—of the mobility of American Labor, see the Board of Trade (Great Britain) investigation: "Working Class Rents, etc., in American Towns" (1911). CD 5609, Pt. V. "... As a consequence partly of the comparatively rapid industrial development of the country and partly of the scope of its resources, and acting in response to the opportunities which are offered, either in centers where urban industries may be more rapidly expanding, in agriculture or in mining the mobility of labor is unusually great. In fields of employment that are well known as centers towards which great numbers of foreigners drift; in which much of the labor is unskilled; in which work is especially laborious as in the iron and steel works, or especially intermittent as at the stock yards and packing houses of Chicago, the constantly changing stream of labor that passes through is a conspicuous factor of the situation. But in general, there is an unusual degree of movement and restless change."

[32]F. W. Taussig, "Principles of Economics" (Revised Edition), Vol. II, page 142.

[33]G. D. H. Cole, "Introduction to Trade Unionism," page 11.

[34]G. D. H. Cole, "Introduction to Trade Unionism," page 61.

[35]For an eloquent and incisive discussion of this whole subject, based, of course, on the facts of his own time, see the chapter in J. S. Mill, "Principles of Political Economy," entitled "Of the differences of wages in different employments." Book II, Chapter XIV, concludes: "Consequently the wages of each class have hitherto been regulated by the increase of its own population rather than of the general population of the country." Page 393. (Edition Ashley.)

[36]J. N. Stockett, "Arbitral Determination of Railway Wages," pages 165-6. See also account in Lord Askwith's "Industrial Problems and Disputes" of the influence of customary differentials upon wage movements during the war, pp. 400-26.

[37]Page 232, Vol. II (1918-19), S. Aust. Ind. Reports, The Furniture Trades Case.

Section 1. The transactions of distribution arranged in terms of money. How does this affect the outcome of distribution as regards wages?—Section 2. The characteristics of price movements.—Section 3. The direct and indirect effects of upward price movements upon the distribution of the product.—Section 4. The direct and indirect effects of falling price movements upon the distribution of the product.—Section 5. The doctrine of the "vicious circle of wages and prices" examined. Its meaning and importance.

1.—Up to this point the investigation of the forces which govern wage incomes has proceeded with only the most incidental acknowledgment of the fact that the whole series of processes which is described as production and distribution is performed with the aid of a monetary system. Production entails a constant comparison and calculation of money values. The transactions of distribution likewise. How does the intervention of a monetary system affect the outcome of distribution? How does it modify the share of the wage earners in the total product of industry? The subject of prices and price levels is one of the most difficult of economic subjects. However, our purposes do not require any inquiry into the generaltheory of the subject. It will suffice for us merely to recognize the existence of different types of price movements, without investigating except at particular points the conditions which govern them.

2.—It is common practice to use the term "price level" to denote the position of prices of commodities in general. The price level is never anything more than the concept of a collection of prices of particular commodities. It is convenient to be able to express the position of this collection of prices by a single figure. To do this, use is made of various statistical devices by which this collection of prices can be combined into one price—which will be statistically representative of the collection. That single figure is known as the Index Number of that collection of prices. Changes of the Index Number represent changes in the position of the collection of prices from which it has been statistically derived.

All price changes are changes in the prices of particular commodities. Of course, a change in the price of one commodity may produce a change in the prices of other commodities. Relatively small and occasional changes in a few, or even in a great many of the prices which make up the price level, have no importance for the problem of wages. Indeed, if the price level remained nearly stationary there would be no necessity of undertaking this investigation of the effects ofprice change upon the distribution of the product. However, large and protracted changes in the price level do occur, and these are genuinely important factors in the distributive outcome.

A study of the major price movements of the past makes clear the chief characteristics of these large and protracted changes in the price level. They are irregular changes. That is to say, all of the individual prices which make up the price level do not change at the same time, nor to the same extent. Certain prices may even change in opposite directions.[38]

It is well to mark also, in passing, that the prices of some or many of those articles which occupy a very important place in all calculations of the cost of living of the wage earners—the articles of food and clothing, and shelter—may change in a different measure, or even in a different direction from the prices of the other commodities which compose the general price level. This possibility is the most genuine as regards food prices. Movements of food prices, and, indeed, of the prices of all agricultural products, are apt over short periods to be determined by weather conditions rather than by the industrial events which govern the general price movement. Mr. W. C. Mitchell in his book on business cycles studied the relationbetween the movements of retail food prices (the figures ordinarily used in cost of living investigations) and general business conditions during the 1890-1910 period in the United States. He writes in conclusion that "these figures (i.e., of 30 retail food prices) indicate a certain correspondence between retail prices and business conditions. In 1893, indeed, the thirty foods rose slightly instead of falling, but they declined during the dull years which followed the panic, and rose again when prosperity returned. The rise was slow until 1900-02; it became slow again in 1902-04; but rapid in 1905-07. The panic of 1907 came too late in the autumn to exercise much influence upon the average retail price level of that year. On the whole, this series reflects the course of business cycles better than might have been expected. For the supply of vegetables and animal foods varies in an arbitrary fashion determined by the weather, and the demand for staple foods is less affected by prosperity and depression than that for the more dispensable commodities."[39]Even over periods of some duration there may be a markeddifference between the movement of food prices and other prices.

3.—Changes in the general level of prices must have prior causes, but they, themselves in turn cause economic disturbance. They give a tilt to the whole industrial system which manifests itself in the outcome of distribution. The effects upon the distribution of the product of an upward movement of prices are ordinarily different from those produced by a general decline in prices.

It is well to begin with the first case—a period of a rise in the general price level. To give an accurate analysis of the successive interactions by which an upward movement in the general price level, once stimulated, asserts itself, is both a delicate and lengthy task. It cannot be attempted here.[40]It suffices to note the ordinary distributive results of the process; with the important reservation, however, that they do not occur in the measure that the rise is occasioned by a general reduction in the productivity of industry such as might be caused by war.

There are firstly what may be called the direct results. Prime costs of production do not increase as rapidly as prices, and supplementary costs rise even less rapidly than prime costs. Prices rise faster than wages and interest charges, and rents tend to remain fixed by leases and other arrangements.Especially in the first year or two of rising prices, the rise in wages tends to be slow; in the later stages it ordinarily becomes more rapid.[41]Thus Mitchell in his study of wage and price movements during the Greenback Period in the United States (1860-80) writes that "... The table shows an almost universal rise of wages during the war—though a rise far from equal to the advance of wholesale or retail price."[42]And in his study of price and wage movements from 1890-1910 in the United States he writes, "The figures indicate that the prices of labor are influenced by changes in business conditions, but in less measure than the price of commodities, even at retail. The general average declines after the panic of 1893, recovers in 1896, advances in 1898-1903, makes very little gain in the dull year of 1904, and then rises rapidly again in 1904-7. But the degree of rise and fall is considerably less than that of commodities at wholesale and just about the same as that of food at retail."[43]

The lag of wages behind prices varies in degree in different industries and occupations, for neither prices nor wages go up uniformly. The general direction of wage change is marked, but there is nevertheless considerable variation in the amountof wage change.[44]These variations in wage change are to be explained by the fact that the wage earners tend to fall into groups whose economic fortunes are in some measure independent of each other. They therefore are only slowly affected by changes in each other's position.

On the other hand, since the increase in expenses of production in most industries tends to lag behind the rise in the price obtainable for products, profit returns increase during such periods, especially in industries in which the wages bill is an important part of the expenses of production. To quote Mitchell again, "The net resultant of these processes is to increase profits. Of chief importance is the fact that supplementary costs rise slowly in comparison with the physical volume of business.... In many instances prime costs also lag behind selling prices on the rise...."[45]

The definite exception to this last conclusion is when the rise in prices is caused by general lowering of the productivity of industry. And soalso it may be said that to the extent that higher prices are merely a mark of an increased cost of labor, or a drop in the efficiency of industrial enterprises, it does not follow that profits are growing. It is generally held that there is such a falling off in the efficiency of industrial enterprises, and an increase in the cost of labor in a period of very rapid business expansion and rising prices—especially toward the end of the period. Mitchell writes: "... Prosperity is unfavorable to economy in business management. When mills are running overtime, when salesmen are sought out by importunate buyers, when premiums are being offered for quick deliveries, when the railways are congested with traffic, then neither the over-rushed managers nor their subordinates have the time and the patience to keep waste down to the possible minimum. The pressure which depression applies to secure the fullest utilization of all material and labor is relaxed, and in a hundred little ways the cost of business creeps upward."[46]

Then there are the indirect effects of the process of price change upward. Since profits generally are large, production tends to be stimulated and the volume of production increases. The turnover of industry is quickened somewhat. Plants are more fully utilized, and unemployment is small. More overtime is worked. The total earnings of the wage earners are likely to advance more than wage rates. The extent of the divergence between the increase in hourly or piece rates and weekly or yearly earnings is likely to vary greatly according to the nature of the causes of the price movement. When the price movement is just the reflex of a situation of depreciated paper money, for example, the volume of production may or may not be increasing.

An interesting study of the divergence between hourly earnings and weekly earnings for the recent war period (Sept., 1914-March, 1919) is contained in one of the Reports of the National Industrial Conference Board. In the metal industries (those most directly affected by the war) the advance in weekly earnings for men was stated to be 103 per cent. as against 71 per cent. in hourly earnings. In the rubber and chemical industries the increases in weekly earnings were greater than in hourly earnings also, but not to the same extent as the above. In the textile industries the percentage increases were practically equal, while in the boot and shoe industry the increase in weekly earnings for men was less than the increase inhourly earnings. And for women in most industries the weekly earnings show the smaller per cent. of increase.[47]Of course, figures of yearly earnings would be more significant as a comparison.

It is not easy to reach a general conclusion in the matter. It may be said that if the increase in prices is but the mark of an ordinary business revival—with no unfavorable attendant circumstances—weekly and yearly earnings will be favorably affected. Whether they will be affected sufficiently to prevent real wages from falling, particularly at the beginning of the period of rising prices, whether towards the end of the period real wages may not actually have increased—these are questions it is not possible to answer exceptas regards a concrete situation. And if the increase in prices is the result of currency inflation, or of a general falling off in the level of production, weekly earnings are likely to be even more unfavorably affected during the period of price increase than hourly rates.

4.—The effects of the process of falling prices may also be considered as direct and indirect. The direct results are somewhat of the opposite character to those just related for a period of rising prices. It is difficult to generalize about them. If the period of falling prices follows closely upon a period of sharply rising prices, during which latter period wage increases lagged greatly behind price increases, the tendency for wages to rise may continue to manifest itself for some time after prices have begun to drop. An example of such a period is furnished by the years immediately following the Civil War.[48]In the case of the price decline of the year—1920-21, however, wage decreases have come promptly—and this is more likely to be the ordinary case. Unless industry in general becomes more efficient during the period, a continued fall in the price level tends to bring about a fall of some degree in the wage level. However, just as in periods of rising prices the wage increase usually tends to lag behind the retail price increase, and even more behind thewholesale price increase, so in times of falling prices, wages often tend to fall more slowly than retail prices, and much more slowly than wholesale prices.[49]

The wages of different groups do not fall equally. The same dispersion that was noted in times of rising prices is found equally in periods of falling prices. This is to be explained in the same way as the dispersion which occurs in periods of rising prices.[50]Organization, however, is likely to play a more decisive part in resistance to reduction of wages than in demands for increased wages. Industries in which the wage earners are highly organized generally find it more difficult to economize by way of wage reduction than industries in which the wage earners are not organized.

The range of profits of industry during periods of falling prices will depend upon the nature of the causes which produce the decline. If it is simply the result of an increase in industrial efficiency, or progress in the industrial arts, profits will continue to be satisfactory and may even be on the increase. If, on the other hand, the price decline results from the occurrence of those short periods of forced liquidation known as crises, and is accompanied by that state of recuperative and cautious business activity known as depression,profits in most industries are apt to be quite low. Such was the 1893-96 period in the United States. During the period of forced liquidation and immediately thereafter, the number of bankruptcies is likely to be high.[51]No general statement is possible concerning the duration of such a period of depression and low profits; all accompanying circumstances play a complicating part in retarding or hastening business recovery.—The present depression of 1920-21 is almost of unprecedented duration, for example. Nor should it be supposed that the state of depression must be identical with the period of price decline.[52]Given favorable circumstances, the price decline soon leads to a search for new methods of economy in production. Raw materials are likely to fall in price. Supplementary costs are rapidly reduced. The price of labor tends to fall. Even though prices continue to fall slowly, profits may rise to a level encouraging to business activity. This may also be true of a period of liquidation not preceded by crisis.

In conclusion, it can only be repeated, however, that confident generalization as to the direct effects of falling prices is impossible. Each business cycle has its own peculiar characteristics—it is unique as Mitchell says.[53]

So, too, as to the indirect effects of a generalfall in the price level. No one description can be given that will hold true of all instances. If the main cause at work is of the kind that may be called "natural," for example, a gradual increase in the productivity of industry, or a decided falling off in gold production, such periods are not necessarily periods of depression in industry. Employment may be constant and weekly and yearly earnings high. Thus the period of 1873-1896 in the United States was one of declining prices and it is generally admitted that that period was one of great industrial activity.[54]Moments of excessive activity are rarer in periods of falling prices than in periods of rising prices, but the average amount of unemployment may be either greater or less. Again, if the decline of prices is in reality a movement from a state of depreciated paper money to a gold standard, there is a possibility that the period may be one of industrial activity due to a prevailing confidence in a coming recovery. It is more likely, however, that such a period will be characterized by a falling off in business activity and an increase in unemployment, particularly at its commencement.

Lastly, if the price movement is an indication of such a period of depression as may precede and usually does follow serious industrial crises, it is ordinarily accompanied by liquidation and curtailment of production. In these periods, and especially at their height, unemployment grows andearnings fall more than wage rates. Or wage rates may remain comparatively steady, but weekly and yearly earnings will fall. The extent to which this fall in earnings will go depends upon the seriousness of the industrial maladjustments.[55]Still it is safe to conclude that a period of serious depression following upon a crisis is the least favorable phase of the industrial cycle for the wage earners—notwithstanding the fact that wages frequently fall more slowly than wholesale prices, and somewhat more slowly than retail prices.

5.—Our object in discussing the effect of price movements on distribution is to discover how they complicate the problems of wage settlement. Before proceeding to this main purpose, however, it is desirable to pay particular attention to one doctrine of the relation of wage change to price change which figures prominently in current discussion.

That is the doctrine known as the "vicious circle of wages and prices." It has been well stated by Mr. Layton: "It is often asserted that a rise in wages is only a move around a vicious circle, the argument being put thus; starting with a rise in wages achieved, let us say, as the result of a strike, the increased wage bill will add to the cost of production, and so raise prices; if the rise becomes general, the cost of living will increase and diminish the purchasing power of wages; this willproduce a renewal of discontent among the working classes and result, perhaps, in a further demand, culminating in a strike for still higher wages."[56]This doctrine is affirmed somewhat indifferently, when the demands for increased wages are made during a period of a relatively steady price level, or during a period in which the price level is rising steadily. What elements of truth does it possess and what is its importance?

The first thing to note is that the series of events visualized in the above quotation can be set into motion by any other cause which disturbs the price level just as well as by a demand for increased wages. For example, a great influx of gold into the United States may take place as a result of a steadily favorable balance in international trade. Bank reserves may mount, discount rates may fall, and if all other circumstances happen to be already favorable, a period of increased industrial activity may follow. Demand for basic products will increase and prices will begin to rise. With the tendency of prices to rise, the general demand for labor will increase. Wage demands will follow, and all the conditions required to make the theory applicable are supplied.

Certain conclusions may be stated at once. Firstly, the industrial situation is rarely so balanced, no matter what the price situation, that a measure of wage increase may not be possiblewithout an equivalent increase in prices. The distributive situation is never one of static equilibrium. The gain of one group or agent of production may simply be another's loss. Each group or agent strives for a large return. If wages go up, profits may go down, or new methods of production may be devised, or strikes may cease. The same possibilities exist in essentials, irrespective of any prior price movement. The movement of prices upward simply gives ground for the presumption that there is a greater possibility than usual of increasing wages without causing equivalent price increases.

It is incorrect to reason that all participants in distribution must come off equally well in this succession of changes. A continuous testing out of the distributive effectiveness of the various agents of production, and of any divisions which may exist within each agent, occurs. The various groups of wage earners may be better or worse off than before. When the price level has shown a prior tendency to rise, there is good reason to believe that the wage earners stand to gain by a vigorous policy of assertion. For then in particular, unless the general rise in prices is to be accounted for by a reduction in the general productivity of industry (a possibility always to be considered), wage increases can come out of the extra income which the other agents are in receipt of because of the price movement.

Secondly, in normal times the process visualizedcould not go on indefinitely. Sound banking practice imposes a limit upon credit expansion. In an abnormal time such as Europe is now passing through credit expansion may, indeed, continue beyond the point dictated by banking reserves. Thus depreciation ensues. This, in turn, is ordinarily limited by the desire to return to a gold basis; otherwise it results in financial chaos. Barring out this last eventuality, the process of price change has a final limit, which must set a limit upon wage increases.

What these general theoretical propositions regarding the idea of the vicious circle do show, is that this idea is in itself an attempt at a complete theory of distribution. That theory, if consistently formulated, would be that the product of industry is already being shared out among the various agents of production in such a way that an attempt on the part of any agent to get more than what it is receiving at any particular time can result only in a price increase. For each agent, it is presumed, is getting its "normal" share as settled by the general economic position and certain unchangeable economic laws. The idea is but the shadow of the theories of normal distribution mentioned in preceding chapters. It does, in common with these theories indeed draw attention to certain fundamental economic relationships. These Judge Brown has expressed well in one of his decisions which reads, "The element of truth in the 'Theory of the Pernicious Circle' isthat, at a given stage in the history of a particular society, there is a limit to the amount which should properly be awarded for wages,—both wages and profits have to be paid out of the price paid by the consumer. If, whether by collective bargaining or by strikes, or by judicial regulation on the part of the public authorities, an attempt is made to narrow unduly the margin of profit on capital, then there is likely to be a period of industrial dislocation, and every class in the community is likely to suffer."[57]But the idea has all the misleading effects which have been attributed to that general theory of distribution of which it is a corollary. It is derived from an analysis of the distributive process which does not fit all the facts.

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