The GM Wage Pattern

June 7, 1948

The General Motors wage settlement last week transformed the country’s business outlook over night. It marked the formal opening of the third round. Unions everywhere will seize upon the precedent.

The GM settlement will be all the more influential because of a certain prima-facie reasonableness. In addition to providing an initial increase of 11 cents an hour (8 cents for a “cost-of-living adjustment” and 3 cents for an “annual improvement factor”), it provides for quarterly adjustments for further changes in the official government consumers’ price index and for an additional 3 cents an hour as an “annual improvement” factor.

On closer examination, however, the flexible features of the GM settlement are found to be virtually all one way. No matter how much cost of living should fall, the downward adjustment on that account cannot exceed 5 cents an hour. But there is no corresponding upward limit if the cost of living should rise. The “adjustment” has a floor but no ceiling. And the 3-cents-an-hour “annual improvement” increase is to be granted whether or not man-hour productivity is in fact increased correspondingly.

General Motors, the biggest industrial corporation in the country, can presumably afford this type of wage contract. But American industry in general can certainly not afford to begin with still another “cost-of-living” increase. Official statistics already show, in fact, that whereas the consumers’ price index has increased 69 percent compared with the 1935–39 level, average hourly industrial earnings have increased 115 percent. On this prewar base, therefore, the first “cost-of-living” adjustment, instead of being 8 cents an hour upward, would have to be an average of 27 cents an hour downward!

We must remember, again, that the consumers’ price index represents an average of many different prices. If companies whose products have risen in price much less than the average were nonetheless compelled to pay wage increases equal to the average, they would either be forced out of business or forced to raise prices. If the price index were thus forced up, this would of course in turn require still further upward cost-of-living wage adjustments. And the uniform application of the GM cost-of-living formula would also prevent the kind of constantly changing variations among different wage rates that are necessary to draw workers into growing industries and out of declining industries.

The same sort of consequences would follow any automatic, uniform “annual-improvement” wage increases. Owing to new machinery and methods, the productivity of the average American worker has in fact in recent times been increasing at the rate of 2 to 2½ percent a year. But here again it must be kept in mind that this is an average, both of many years and of many different industries. An investigation by the United States Bureau of Labor Statistics shows that the physical output per man-hour dropped in the boot and shoe industry from an index number of 113.2 in 1941 to 105.9 in 1944, in the cement industry from 108.3 in 1941 to 83.8 in 1944, and in nonferrous metal refining from 108 in 1940 to 95.9 in 1945. How can industries or firms in which man-hour productivity is actually declining afford to pay automatic “annual improvement” increases?

Finally, it must be remembered that this long-run average increase in labor productivity has not been automatic. Its continuance cannot be taken for granted. It has taken place in America because capital accumulation has been steadily raising man-hour productivity on the average by putting more or better tools into the hands of the workers. But this capital accumulation has been made possible by sufficiently high profits to enable corporations to plow new capital back into plant expansion. If corporate profit margins are reduced by taxation or excessive wage increases to where they are dangerously narrow, “annual improvement” increases, even on the average, will no longer be possible. Labor will then find itself moving into lower instead of higher living standards.