Business: The Wages of Inflation

Carter is flirting with no-standard standards

The Carter Administration’s efforts to devise another wage guideline to replace one that nominally expired Oct. 1 led to a poignant business-labor standoff last week. The White House in September had hailed the new 18-member Pay Advisory Committee as part of a ”national accord” on wage policy that would mark a healing of the rift between the President and organized labor. When the committee’s first working session took place, however, all the problems of proper compensation in a period of 13% inflation burst open.

Lane Kirkland, who is expected soon to take over from George Meany as president of the AFL-CIO, launched a sharp attack on the old 7% pay ceiling, calling a single guideline figure “a mad infatuation with a figure that bears within it the seeds of its own destruction.” Kirkland wants to replace the old standard with case-by-case wage settlements. The top business representative on the board. National Association of Manufacturers President R. Heath Larry, argued equally adamantly against moving toward any à la carte pay guide. At another point in the meeting, Kirkland and R. Robert Russell, director of the Administration’s Council on Wage and Price Stability, heatedly squabbled over whether unions should try to make up in wages the income lost due to higher energy prices. The committee’s chairman, Harvard Economist John Dunlop, must have thought that he was back at a business school faculty meeting.

The White House hints that it may be preparing to drop the guide out of the guidelines. In the course of courting labor’s support in the 1980 election, the Administration has drifted toward accepting the union position that the pay ceilings need more “flexibility.” Says Labor Secretary Ray Marshall: “With inflation barreling along at its current rate, the old guidelines are clearly untenable.” A top Administration aide confided last week: “It would be unreal to expect labor to accept continuation of a program that was successful in holding down wages but a disaster in holding down prices.” And one official on the COWPS, which administers the standards, sheepishly maintained that the anti-inflation effort “could be just as well off without a guideline program.”

The abandonment of a firm pay guideline, if it occurs, would have broad implications for the economy, which is now delicately poised between two perils: even more inflation and deeper recession. Fresh harbingers of both of these threats appeared last week. The unemployment rate, which had dipped unexpectedly to 5.8% in September, returned to 6% last month—a sign of a softening economy. But other figures showed business continuing to perk along despite attempts to dampen inflation by curbing growth. Prices charged by wholesalers rose another 1% in October, while the index of “leading” indicators, which is supposed to foreshadow future economic trends, rose by a strong 0.8% in September. The net effect: the mild downturn that both the Administration and the Federal Reserve desire seems to have been postponed indefinitely.

Although such powerful unions as the Teamsters and the United Automobile Workers have mangled the 7% pay guideline in the contracts they have won this year, the standard has nonetheless helped moderate many salary agreements. In the past year most workers, especially nonunion ones, have settled for pay hikes close to the 7% standard. Wage increases in major union contracts actually declined overall from last year’s 8.2%, to 7.5% from January through June. Carter’s chief economic adviser, Charles Schultze, hails this as “one of the truly unreported stories of the year.”

Without slower pay hikes, oil-induced inflation would have soared even faster. Schultze says his main goal now is to continue the moderate wage trend so that higher oil prices will not ripple more inflation through the whole economy.

Yet the recent salary moderation has been far from uniform, and some yawning disparities have appeared. Sibson & Co., a New Jersey management consultant firm, calculates that the compensation of top business executives has increased by 14.8% this year with the help of salary bonuses often reaching 20%. Among wage earners, the hourly pay of union employees grew by only 8.3%, while that of nonunion workers edged upward just 7.2%. In other categories, the Labor Department reports that the earnings of an attorney rose by 8.9% on average; that was less than his stenographer’s 12% increase but well above his file clerk’s 5.5%.

In any period of rapid inflation, well-organized workers and those with scarce skills can protect themselves better, but even they eventually fall behind rising costs, and their living standards decline. Like Oliver Twist, American workers are expected to begin asking, “Please, sir. I want some more.” The minimum wage is already due to rise next Jan. 1 from $2.90 an hour to $3.10. Nonunion workers are likely to start demanding greater pay hikes to catch up with both union salaries and inflation.

Brookings Institution Economist Arthur Okun has a “nightmare vision” of a major employer without company-wide unions such as IBM or Du Pont announcing some day that it was starting cost-of-living allowances in order to “keep the union organizers off their front lawns.” Okun warns that if such automatic inflation pay increases spread into nonunion firms, “you can mark that on your calendar as a black day for fighting inflation.”

Despite the sometimes impressive figures printed on weekly pay stubs, the average American worker continues slipping ever further behind inflation in terms of actual buying power. Over the past twelve months his real income, in non-inflated dollars, has steadily declined. Just since spring, inflation has eroded the total compensation of a person earning $20,000 a year by about $1,210. Even 10% pay increases at a time of 13% inflation results in a 3% drop in living standards.

To some extent, it is inevitable that prices will outpace incomes in the early stages of a period of high inflation; managers can move to raise the cost of goods and services quickly, but wage increases tend to lag, since they are usually gained only in negotiations, such as when contracts expire. But catch-up attempts, as each group of workers tries to recover income lost to price increases and to stay ahead of other groups, will only lead to higher wage settlements and ultimately still higher inflation. A move toward a no-standard pay standard, if it occurs, could be the first step in a perilous new round of wage and price escalation.