Business: Production Costs: Down

One little-discussed reason for the spate of improved corporate earnings is that production costs in the U.S. are trending downward. Though some businessmen still find themselves in a wage-price squeeze, the Commerce Department’s new index of wage and salary costs per unit of manufacturing production has been moving down since the economy started climbing back last March (see chart). Labor costs usually fall during the early stages of a recovery because production then increases more rapidly than hiring does, but this year’s drop has been abnormally large.

Belated Payoff. The dip in labor costs has occurred primarily because overall productivity has risen faster during this recovery than in the past two recovery periods. Since 1947 the productivity of nonagricultural workers in the U.S. has increased by an average of 3% a year, rising in recovery periods to 7.5%. But in this year’s economic bounce-back, productivity has soared by a remarkable annual rate of 9.5%. Chief explanation of this sudden leap, Government economists believe, is that industry is finally beginning to reap the rewards of its free-spending investment in new plant, equipment and research during the late 1950s.

Whatever its cause, the increase in productivity means that manufacturers can get by with fewer workers—at least for a while. FORTUNE calculates that the current unemployment rate would be 5.5% instead of 6.8% if productivity had not increased so much faster this year than it did in the 1958 recovery. Management is also keeping costs down by a more cautious approach to the hiring of higher-salaried executives and technicians. Says a Federal Reserve Board economist: “Managers are adding only in case of real need. They know that once these high-level men are hired, they cannot be laid off the way wage workers are.”

Slowing Engine. Still another reason for falling labor costs has been a shift in union tactics. Under the pressures of automation and chronic unemployment, union leaders are placing greater emphasis on job-security benefits instead of straight pay raises.The result: manufacturing wage increases, which averaged 5.1% in 1957, will amount to less than 3% this year.

Reinforcing this trend is the decreasing importance of escalator clauses, which provide for automatic wage increases as the cost-of-living index rises. General Electric, Westinghouse and the railroads have completely eliminated escalator clauses from their labor contracts and the steel companies have cut back sharply on escalator benefits. Simultaneously, the engine that drives the escalators has slowed down: since January, the cost-of-living index has advanced only nine-tenths of a point. One sign of the times: the auto industry’s escalator program will probably increase the average pay of U.A.W. members this year by only 2¢ an hour v. 3¢ to 6¢ an hour every previous year since 1948.