Jun 15, 1989 - Malcolm Cohen provided useful references. Maury Pearl ..... as the ratio of young people to the overall work force declines further. Regional ...
DANIEL
J. B. MITCHELL
Universityof California,Los Angeles
Wage
Pressures
and
Labor
The
1960s
and
Shortages:
1980s
As THE U.S. unemployment rate fell during 1988 and early 1989 into the 5-5.5 percent range, observers worried about upward pressure on wage inflation. The concern grew naturally out of the experience of the 1970s, when wage inflation accelerated whenever the unemployment rate fell into the 6-7 percent range. But while such concern is understandable, it may be misplaced. Imagine an economic historian painting the following broad picture of the American labor market. Aftertwo back-to-backrecessions, andsome adversedevelopmentsin the legal climatefor unions, a periodof calm descendedon the labormarket.Wage and price inflationreceded againsta backgroundof relativelyhigh unemployment. There was general concern that wage-setting practices and the climate of employmentrelationswithinfirmswas harmfulto U.S. internationalcompetitiveness. Employerspushedfor relaxationsof workrulesandwage freezes. The advance-of union pay relative to nonunion was halted. Experiments were undertakenwith flexible pay systems such as profit sharingin autos and gain sharingin otherindustries. While there were some dramaticlabor-managementconfrontations,strike activityfell notably.Cooperationseemedto be moreinvoguethanconfrontation. Jobinsecurity,linkedto both highunemploymentandthe spreadingapplication of computersto the workplace,enabledemployersto obtain concessions and cooperationin exchange for job guaranteesand retrainingprogramsfor the displaced. The authorrequestedinformationon economic policymakingand interpretationin the 1960sfromthe followingindividualswhomhe wouldlike to thankfor theirassistance: GardnerAckley, BarbaraBergmann,Lyle Gramley,Janet Norwood, the late Joseph Pechman,Robert Solow, James Tobin, and Lloyd Ulman. KatharineAbrahamand MalcolmCohenprovidedusefulreferences.MauryPearlandRamanandSoodablycarried out necessaryresearchassistanceand conductedthe telephonesurvey describedin the paper. 191
192
Brookings Papers on Economic Activity, 2:1989
Experts warned that the better paying new jobs would go to those with professionalandtechnicalknowledgeandprojecteda dryingup of opportunities forobtaininghigh-wageblue-collarjobs.Fearswereexpressedthatthe American educationalsystemwas not turningout graduateswith skillsneededby the labor market,perhapsleadingto a two-tiersociety with prospects of low wages and limitedjob opportunitiesfor those on the bottom. At the same time therewould be a dearthof employeeswith skills neededto meet the foreignchallenge. In time, however, demandexpandedand the unemploymentrate declined. Accompanyingthe declinewere increasedreportsof laborshortages.Dissident movements arose in the union sector, challengingunion officials who had previouslynegotiatedcontractswith low wage gains or who were seen as too cozy with management.Contractsnegotiatedby unionofficialswere sometimes rejectedby rankand file votes. Union officials, feeling the pressure, reminded managementat companiessuchas Chryslerof previousconcessionsduringhard times anddemandedrecoupment.Inflationof wages andprices accelerated. The account, apparently of the labor market during the 1980s, actually describes the late 1950s and early 1960s. The back-to-back recessions, for example, occurred in 1957-58 and 1960-61. The unfavorable legal development for unions to which the story refers was the LandrumGriffin Act of 1959. Concerns about international competitiveness were easy to find in that era, as the world shifted from dollar shortage to dollar surplus. Employers did mount a bargaining campaign leading to wage freezes in some industries, notably steel. Flexible pay systems were negotiated at American Motors and Kaiser Steel. Workrule relaxations in exchange forjob security were prominently featured in the West Coast longshore contracts. Labor Department projections emphasizing a drying up of blue-collar jobs and an expansion in technical and professional fields were widely publicized.1 Finally, as unemployment fell in the 1960s, reports of labor shortages were heard with increasing frequency, and dissident movements in unions led to contract rejections and pressures on incumbent union officials.2 Concession bargaining waned.3 Despite notable differences-deliberately suppressed in the above story, but discussed later-between the 1960s and the 1980s, the similarities are sufficiently striking to make a strong case for seeking clues in the 1960s, rather than the 1970s, to the likely outcome of the recent
1. For example,Bienstock(1962). 2. Mitchell(1980,pp. 51-52);Sheahan(1967,pp. 57-60). 3. Theopeninghypotheticalquotationreferredto pressureon Chryslerin 1964by auto workersto recouppastconcessions.
Daniel J. B. Mitchell
193
drop in unemploymentbelow 5.5 percent. During the 1970s, several developments made the economy unusually inflation-prone,pushing many estimates of the nonacceleratinginflationrate of unemployment (NAIRU) above 6 percent. The two most strikingdevelopmentswere the divergence of food and energy prices from the trend followed by otherprices andthe deteriorationof productivity. Throughthe 1960s,domestic farmprices were generallykept in line with other prices throughgovernmentinventorypolicies. Stocks, however, were depletedduringthe late 1960sso thatby the 1970sthis policy no longerworked.4Until the 1970s,too, U.S. energy prices were partly insulatedfromexternalpressuresby a quotasystem, andOPEChad not yet learned how to control world oil prices. In addition, world fixed exchangeratestendedto keepinternationalpricesfromgyratingin dollar terms and from rapidlychangingthe competitiveposition of American firms. Thus, during1959-69, the officialconsumerprice index (CPI)and a component measure of underlying inflation that excluded food and energy prices both rose at the same 2.3 percent annual rate. During 1969-79, however, the figuresfor the two measures were 7.1 percent and5.7 percent,respectively.Pricevolatilityalso increasedinthe 1970s.5 A divergence thus developed between measured price inflation and employer"abilityto pay," that is, between the real wage and product wage. The productivityslowdown after 1973, combined with these price developments,made obsolete the traditionalnotion of "3 percent plus COLA" as an appropriateguide to wage setting. However, a failureto recognizethese changes-and a spreadof unionCOLAcoverage due to higherinflation(or inflationuncertainty)andwage controlsincentivescaused union wages to rise faster than nonunionuntil the early 1980s. And in aggregate,real wages (deflatedby an appropriate"domestic" deflator)rose faster than productivityin the 1970s. Both tendencies 4. Hathaway(1974). 5. The officialindex is CPI-Uafter 1978and CPI-Wbefore. For underlyinginflation, all itemsless food andenergyhave been used through1967andall itemsless food, energy, andshelterthereafter.(Thelattermeasureexcludesproblemsintroducedby the inclusion of mortgageinterestratesin the CPIduringthisperiod.However,it was not availableuntil 1968.)The standarddeviationof year-over-yearCPI changes during 1959-69 was 1.5 percentagepoints.During1969-79,it was 3.3 percentagepoints.
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