How to Destroy Jobs

January 20, 1958

Our chief economic danger in 1958 is that we may get inflation and unemployment at the same time. The combination would not be, as some writers seem to think, “something new under the economic sun.” The combination has occurred frequently in Europe and in Latin America. It can occur whenever wage rates move upward faster than prices, unduly squeezing profit margins.

The January letter of the Guaranty Trust Co. of New York contains an able analysis of the danger. “Only a few months ago,” it points out, “spokesmen for organized labor were criticizing manufacturers for raising prices of their products at a time when sales were tending to decline. [Yet] in December, when the demand for labor had been weakening steadily for four months, the AFL-CIO announced its determination to press for higher wages, shorter hours, and expanded fringe benefits in 1958.”

Such policies, as the bank points out, must tend to price union members out of jobs. Unless these policies are corrected, the general business downturn now under way will be needlessly deepened and prolonged, billions of dollars’ worth of potential industrial output will be lost, and the entire economy will suffer—labor most severely of all.

WAGES AS COSTS

Yet union spokesmen declare that employment is declining not because wages are too high but because they are too low. This is merely a revival of the old “purchasing power” fallacy—the theory that the reason production and employment are not “full” at any given time is that there is not enough purchasing power to take the output off the market. The bank’s letter argues:

“An understanding of purchasing power is impossible without a grasp of the basic principle that every portion of the money value of every commodity and service produced is income, or purchasing power, to someone. Purchasing power is derived from output and, in the final analysis, is identical with output. It may be consumers’ purchasing power in the form of personal income. It may be business purchasing power in the form of net profit after taxes. It may be governmental purchasing power in the form of tax revenue. . . . It follows that purchasing power is automatically maintained as long as output is maintained. . . . The exclusive emphasis upon wages as a source of purchasing power is a fallacy fatal to clear economic thinking. Wage income is, of course, a form of purchasing power, like any other type of income. To the managers who make business decisions and create jobs, however, wages are primarily costs. At a time when cost-price relationships are already tending to make it unprofitable for business concerns to maintain and expand operations and thus to create jobs, nothing could be more short-sighted than to aggravate the difficulty by insisting upon a further increase in the cost of employment.”

WAGE RATES VS. INCOME

Though this analysis is correct, there is another and perhaps simpler way of pointing out the fallacy. The error seems to stem largely from a simple confusion between hourly wage rates and total wage payments, because the word “wages” is loosely used to cover both. It is seldom assumed that if a manufacturer increases his prices his dollar volume of sales will rise in direct proportion. In such a case few people confuse a price with an income. They recognize that a rise in prices, greater than justified by demand, will reduce volume of sales. In the same way a rise in hourly wage rates, greater than justified by labor’s marginal productivity, must reduce employment and probably reduce total payrolls and purchasing power.

The Guaranty Trust Co.’s letter ends with a well-timed warning:

“Spokesmen for the workingman have always been prone to quarrel with the employer’s profits. They have never been able to reconcile themselves to the fact that those profits are really the workingman’s best friend. It is the prospect of profits that creates the job, and it is the realization of profits that maintains the job. . . . When profits are squeezed and demand is faltering, the attack [on the employer’s profits] becomes a formula for unemployment.”