Wages--the Crux of Our Problem

‘ No question is more important than that of wages — most of the people of the country live on wages. The scale of their living — the rate of their wages — determines the prosperity of the country.’

-HENRY FORD

THE worker cannot view wages objectively: they are all that he gets in return for the time and effort he puts into a job. Whereas the expert economist can enter upon a long disquisition on the relationship of total national wage expenditures to national income and the national return to capital, the worker views labor from one standpoint only: —

How much does he get? What is in the pay envelope? What can he give his wife? How much must he pay to the union in dues? What will remain over the cost of food and lodging for the installment payments? How long will the job last? Must there be savings for a period of unemployment? Is there enough for any savings? Are his wages likely to increase or is he in a rut?

These are the questions which face each individual worker, and from the consequences of which there is no escape.

Wages are money. They are the reward for work. They are the only real reward that the worker gets. He may fight for shorter hours and better conditions and recognition of the union, but what he really wants is money — as much money as he can get out of the job. And money is not to be measured in terms of some face value that a government prints on a piece of paper. The value of money is its purchasing power, and that alone. The value of a five-dollar bill is what five dollars will buy.

Social philosophers have written voluminously upon the beauties of labor and the rewards that come from a knowledge of social service. Before Russia became Communist, idealists gravely hoped for the day when men would produce goods because they were urged by a social impulse to be useful. But as the economic experiment in Russia continues, the rôle of wages becomes increasingly important there— as important as in a capitalist state. Soviet Russia has now adopted all the wage devices of capitalism, and the dream of economic equality passes into literature.

The human race has discovered only two ways of producing goods and services involving human labor: one is slavery — that is, a system in which the worker receives no wages for his labor, but is clothed and fed and housed by his master; the other is a wage system by which the worker receives a direct money compensation from which he cares for himself freely according to his rights and tastes. Slavery guarantees a very large measure of social security, but no freedom; the wage system affords a large measure of personal freedom, but little security.

As the capitalist system advances, slavery gives way to the wage system. Serfdom, indentureships, unpaid apprenticeships, racial slavery, in time disappear. The worker gets money, some of which he spends, some of which he sometimes saves. When he saves money and invests it in some form that brings him a profit, he becomes ipso facto a capitalist. Just as a laborer is one who works for wages, a capitalist is one who makes a profit out of the investment of surplus capital, no matter what the origin of that capital may be. It is obvious that under the American system a man may and often does belong to both categories at the same time. In some industries the workers invest so much of their surplus wages in the industry that they become important capitalistic owners of it. This is true, for instance, of the Pennsylvania Railroad.

It is the practice in this country to qualify an intermediary group — namely, those who work for a salary, the ‘white-collared’ class, the professional men and women, the management of enterprise. This group may be recruited either from the laborers or from the capitalists, and often enjoy an income both from their work and from investment. Socially the salaried person holds a more favored position than the wage earner and often he enjoys a greater security, but the amount he earns in money need not be greater than the income of the wage earner. Teachers, for instance, earn less than plumbers at times.

It is a characteristic of the capitalist system that no man is inevitably bound to remain in the class in which he originated. If he can come into possession of enough money, he can translate himself to a more advantageous class. Therefore increased income from wages not only serves to make it possible for the worker to purchase a wider variety of things, but also makes it possible for him to improve his social as well as his economic status. No reward for work other than wages can perform this particular function.

I

In the United States, wages have been steadily on the rise, and the relationship of wages to the aggregate national income has shown a fairly constant increase for the employed worker. (By national income is meant ‘ the net volume of goods and services produced by a nation within a given period — a year,’ according to the Brookings Institution publication, America’s Capacity to Consume. To this definition must be added the qualification that it is measured in money.)

Between 1900 and 1929, the amount of the national income distributed as wages, salaries, and pensions increased from 53 per cent of the value of goods and services produced to 65.1 per cent. Salaries increased more rapidly after the war than wages, but taken together they show a constant rise.

It is to be noted that, according to the Brookings report, the per capita increase of income from 1900 to 1929 was nearly 38 per cent. During the same period, ‘the per capita of human time and energy has decreased something like 12 or 13 per cent. This means that, in addition to the increase in per capita income of goods and services, we have obtained the satisfactions that come with greater leisure.’

Wages can only be increased as the national income increases. That is, there must be a general increase in the total value of goods and services, so that a larger share can be allotted to wages, salaries, farmers’ income, and profits. Wages cannot rise when all other subdivisions of national income fall, for the very simple reason that in those circumstances the money does not exist, to underwrite a rise. If the increase is not general, then a group in the country suffers a grievance. For instance, whereas wages, salaries, and profits increased between 1900 and 1929, the farmers’ income decreased between 1919 and 1929 from over 9 billion dollars to approximately 5.5 billion, a decline of almost 40 per cent, which the Brookings report says ’is quite out of line with general trends.’ Therefore the farmer became a political and economic problem; his purchasing power was curtailed. The disparity between wage earnings and farmers’ earnings was a greater factor in prolonging and intensifying the depression than the disparity between profits out of capital or rents and farmers’ earnings.

Labor leaders and radical economists often speak of wages as though they were something altogether apart. The policy of the ‘New Deal,’ in its first and radical phase, was to increase wages and raise prices, without regard to profits. That is, just as the war inflation, increasing indebtedness, and an unscientific tariff threw the farmers’ income out of line, and as the depression confused all economic relationships, so the recovery sought to benefit the worker and farmer at the expense of the salaried man and the capitalist. But it soon became evident that unless national income increased beneficially for all groups it would be impossible to achieve a healthy economic picture. The selection of favored economic groups was the initial error of the New Deal, but was an inevitable psychological result of the shock produced by the collapse of the American economy.

Those who constantly point to vast fortunes of a few individuals, to the huge sums made, not earned, in Wall Street by speculators, and to the measly wages of some workers, obscure our understanding of the problem of wages. For it is impossible to be constructively objective if one compares Mr. Rockefeller with a soft-coal miner and says, ‘ Behold what the profit system and the wage system have produced!’

That dramatic method is valuable for the soap-box orator; it has no place in any serious study of economic conditions. Unfortunately, for too many of us economics does remain a gloomy science. Too many avoid exact figures and accept the obvious, which only too often is altogether untrue.

Actually, the situation is that wages can become too high. That point is reached when so large a share of the national income goes to wages that capital can no longer continue to operate except by using up its reserves. When the reserves are gone, capital ceases to function. Even so huge an industry as the United States Steel Corporation can only operate without profits as long as its reserves last. After that comes bankruptcy. The laborer then either is on reduced rations, which occurred during the ‘spread the work’ period of the depression, or is thrown out of work altogether.

The government does not, under our system, take the place of the capitalist in the production of goods and services. For if the government produces at a loss it makes up the difference in taxation, and taxation reduces the real income from wages as it reduces the real income from profits. All social and economic classes in the community pay taxes, and although it is possible to tax the capitalist without taxing the laborer by such a device as the income tax, ultimately the price of the goods and services absorbs a share of the tax, or goods and services are taxed directly, as in the sales tax. Class taxation does not guarantee that the tax will not be paid by all classes.

When the government operates as a capitalist at a loss, even though for a time it pays high wages, it is moving in the direction of high taxes or inflation, and both reduce the net income of the worker, if not at the moment, then soon enough to make him realize that he has been tricked for political advantage. If the government, as a capitalist, earns a profit from productivity, then the relationship of wages and profits to national income is unchanged, except that the government may be prepared to accept a smaller return for its investment.

II

The problem, then, is to analyze the profits of industry in the United States so that a judgment may be formed as to whether the return on capital has been so large as to be out of line with wages. If it were true, as some say, that 2 or 3 per cent of the popidation absorb 75 or 80 per cent of the national income, then there would be justification for an attack on the profit system. In fact, such a phenomenon would destroy the capitalist system.

I have before me a table showing the percentage of net income to gross business of all corporations in the United States after taxes had been deducted, taken from the United States Treasury returns: —

PERCENTAGE OF NET INCOME TO GROSS BUSINESS OF ALL CORPORATIONS IN THE UNITED STATES

The fourteen-year average of net income is 2.42 per cent. It may be objected that, since this table includes all corporations, the average is low because agricultural and small business failures distorted the picture. Therefore I take from the same source and for the same period data covering all manufacturing corporations, and I find that the average for the fourteen-year period is 3.62 per cent. The Treasury computes these data from income-tax returns, which may be a trifle low, because of diverse accounting methods, but analyses of profits worked out by other statistical agencies hover about the same average. It is possible to conclude from all the data available that the average profit of all corporations or of manufacturing corporations alone, in the United States during this century, has been under 5 per cent.

Profits, to be comparable with wages, must come out of earnings. It is true that during the war and the boom, as there was an increase in invested capital and in the volume of business, there was also an increase in the aggregate income, and that some of these sums were put back in the enterprise either in the form of improvements and replacements or to constitute reserves against the rainy day, which actually appeared in 1929. Labor as well as capital benefits by this use of income, as it not only provides more work at better pay and increases the use and variety of goods, but also makes it possible for a large number of corporations to continue to employ labor during the profitless years. The utilization of surplus profits to increase plant and business does not disclose an effort of capital to hide profits; rather it is evidence of a constant and normal development of business. All economic advance has been made by ploughing profits back into productivity.

Wages become too high when participation in industry becomes unprofitable to capital or when they raise the price of goods beyond the consumer’s ability to buy. During the boom period, 1925 to 1929, the average profit for all corporations was 4.45 per cent, and that proved adequately attractive to produce a period of exciting economic activity. In 1930, when profits went down to 0.61 per cent, capital disappeared from every market and labor found itself without work and wages. The point at which capital will not function has not been determined, but the phenomenon has been all too apparent during the past four years.

Administration apologists have called the inactivity of capital the ‘strike of capital,’ implying rather that the New Deal has been sabotaged by capitalists. Any study of economic history would have made it clear to them that it does not matter what individual capitalists may want to do: when profits fall below the point at which economic activity is attractive to capital, economic activity ceases. Even if certain capitalists wanted to sabotage the government, it would make little difference were there a market, for other capitalists in this country or from abroad would enter the market to make a profit. Capital never strikes in the face of a profit.

Soviet Russia’s important technological development is partly due to government enterprise out of taxation, but it is also due to trade credits made available in capitalist countries at attractive terms providing an adequate profit to the capitalists. From that standpoint it is possible to say that economic activity does not occur without profits sufficiently large to encourage the use of capital.

III

Wages are low when the worker does not receive in the aggregate, over a period of, say, a year, enough money to provide, for himself and his family, the necessities of life according to the standard of living usual in his bracket of society. During the war years and the post-war boom period, wages were abnormally high and the standard of living of many workers was shifted upward. If we take the biography of Samuel Gompers as a base, we find descriptions of home and factory conditions, of wages, of working arrangements, which are indicative of a very low standard of living. Take, for instance, this paragraph: —

Any kind of an old loft served as a cigar shop. If there were enough windows, we had sufficient light for our work; if not, it was apparently no concern of the management. There was an entirely different conception of sanitation both in the shop and in the home of those days from now. The toilet facilities were a water-closet and a sink for washing purposes, usually located by the closet. In most cigar shops our towels were the bagging that came around the bales of Havana and other high grades of tobacco. Cigar shops were always dusty from the tobacco stems and powdered leaves. Benches and work tables were not designed to enable the workmen to adjust bodies and arms comfortably to work surface. Each workman supplied his own cutting board of lignum-vitæ and knife blade.

Such conditions have practically passed out of existence in the United States except in the occasional sweatshop. Higher wages have produced a higher standard of living. Mass production has served to increase wages by increasing national income, and the system of installment buying has made it possible for the worker to turn his wages over several times, so that an increasing variety of things are now at his disposal which before the twentieth century were attainable only by capitalists.

The theory of wages has changed. Whereas, before the advent of mass production, capital sought to obtain labor at the lowest possible rate, the worker has since come to be regarded by capital as a consumer, and his wages have been fixed with a view to increasing his consumptive capacity. Henry Ford, in his biography, My Life and Work, states the new theory: —

No manufacturer in his right mind would contend that buying only the cheapest materials is the way to make certain of manufacturing the best article. Then why do we hear so much talk about the ‘liquidation of labor ’ and the benefits that will flow to the country from cutting wages — which means only the cutting of buying power and the curtailing of the home market? What good is industry if it be so unskillfully managed as not to return a living to everyone concerned? No question is more important than that of wages — most of the people of the country live on wages. The scale of their living — the rate of their wages — determines the prosperity of the country.

But Mr. Ford was rationalizing backwards. Actually it was the general prosperity of the country which made higher wages possible; because there was an increased national income, labor got a larger share of that income. It is this which serves as the basis for the New Deal conception that high wages and high prices alone will produce prosperity. But more than that is really required — namely, a profit for capital and a greater security for the worker.

IV

A method of determining wages popular with many capitalists, and generally with labor, involves a wage scale per hour. Under this system capital finds that it can calculate the labor cost of a product and fix the price accordingly; labor is led to believe that it is receiving a very much larger compensation than the facts warrant. Organized labor favors this method because the fixed rate per hour or per day eliminates a graduated scale based upon efficiency of product and equalizes the amount paid to individual union members. To stimulate efficiency, employers often add to the time wage an incentive wage.

The criticism of the time wage is usually based upon criteria of efficiency, and the assumption is that when the time wage proves expensive — that is, when it either increases the cost of production, and finally the price, or cuts into profits — a labor-saving device is employed. A friend of mine recently gave this example. He wrote: ‘An engineer engaged in road building tells me that when common labor went from 20 cents per hour to 40 cents the automatic cement mixer came into use, and that if common labor should return to 20 cents per hour the automatic mixer would pass out of use.’ This may be accepted as characteristic of most industries in relationship to high time wages. A labor-saving device is not employed, as a rule, unless its cost is justified either by reduction of the price of an article or by increased wages and profits. It is demonstrable that in the United States the use of improved technological methods has not, over a period like 1900-1929, reduced employment. On the other hand, a period does intervene between the time that men are thrown out of work and the time when they again get wages. No provision is now made to protect them against this inevitable industrial shift of mechanism. Unemployment insurance can overcome the evils of such a wageless period.

Another wage system is to pay by the piece or the job. This often proves unsatisfactory to labor because of the difficulty in fixing the original rate so that it will be ‘ fair.’ The worker on the piece basis does not willingly accept less than the worker on the time basis.

The principal objection to the perhour or per-day or per-piece wage is that the worker has no way of knowing what his salary actually is. Let us say that a worker gets $5.00 per day in Mr. Ford’s factory. Let us say that he works 150 days during the year. His earnings are actually $750 a year, or less than $2.00 a day. I know a house painter who when he works gets $8.00 per day. He worked 30 days a year — and no more — during the past two years. Actually all that he received is $240 a year, or less than $1.00 a day. This man said that he had to pay a ‘kick-back’ to the labor official to get his job, and he had union dues to pay which further reduced his income.

The worker has to pay his rent monthly, his dues monthly, his installments monthly, for his groceries and meats weekly. By and large, he lives on a month-to-month basis. But he lives not only during the months that he works; he has expenses during the months when he does not work. Such a figure as 69 cents an hour or $5.00 a day sounds tremendous to him, but a little mathematics ought, to convince him that in very few instances does he receive or has he ever received such a sum; because, no matter what the wage scale may be, what he actually receives is an amount of money the value of which is determined by its relationship to prices, and which he has to make go over a specific period of time, say a month or a year. To simplify this statement, his wage is what he can give his wife to buy things with and to save for a rainy day. He has to divide his yearly earnings by 365 and not by the number of days he actually works.

It can matter little to the worker who receives actually $750 a year whether he gets it for 150 days of work or for 300 days of work. In fact, practical experience has indicated that the laborer spends more money when he does not work than when he does, because he has to consume his leisure time. Therefore the problem is not to keep wage scales moving upward, but to devise an annual wage rate which will be sufficient to maintain the American standard of living, to provide profits out of production, and to provide work all the year round.

Actually, this probably will involve a reduction in the wage scale in industries where the wage scales are out of line, but it may not involve any reduction in the aggregate annual income of the worker.

For the purposes of illustration: if a worker should get only $2.50 a day instead of $5.00, but should work 300 days a year instead of 150, then he would break even. In many instances, particularly in service industries, such a reduction would lower the price of the service and therefore increase work, because the price range would be within the reach of a larger group of consumers.

V

Whenever it is suggested that wages be reduced, it is only natural that organized labor leaders and many economists should object. That is because they think in terms of wage scale and not in terms of annual income. Organized labor dislikes to give the appearance of losing ground in its struggle for a higher wage scale. Yet in 1930, 1931, and 1932 more national income was paid out in wages in some industries than was produced. According to figures prepared by the National Industrial Conference Board, labor income in 1929, including wages, salaries, compensation for injuries, pensions, and so forth, formed 63.6 per cent of the national income produced; 69.1 per cent in 1930; 78.8 per cent in 1931; and 80.1 per cent in 1932. Yet the total labor income during that period declined by 40.3 per cent, because the national income declined. In some industries, labor received more than the total income produced. In the construction industry, in 1932, labor received 151.8 per cent of the income produced; in mining, 128.5 per cent; in manufacturing, 118.5 per cent; in trade, 103.5 per cent. This means a terrific mortality for both capital and labor. Under these circumstances, capital continues only as long as it has reserves or can borrow money. After that it closes up. Labor finds itself out of work.

There can be no justification for a refusal to acknowledge that conditions have altered. In the United States, although the rise of wages has been constant, at times that rise has been accelerated without relationship to the rise of productivity or profits. For instance, according to the Statistical Abstract of the United States, published by the Department of Commerce, the following jumps took place in wages per hour (1913 = 00, with index numbers exclusive of agriculture): 111 in 1916; 128 in 1917; 162 in 1918; 184 in 1919; 234 in 1920; then the figure fluctuates between 218 in 1921 and 233 in 1929. As long as it was possible to maintain general prices on that level, boom conditions continued. But when agricultural and mineral prices collapsed — that is, when primary prices fell — the depression came upon us.

During the depression, every attempt was made by Presidents Hoover and Roosevelt to maintain a high wage scale against every realistic factor in the situation. Not only did they fail, but 10,000,000 men were thrown out of work and remain out of work. An effort was made to ‘spread the work,’ to encourage employers to keep up inflated wages while prices were falling and markets were disappearing. The NRA tried the same process. The ‘spread the work’ idea was fallacious, because, while it maintained a high wage scale during a period of falling national income, the money paid to each individual laborer decreased. For instance, when I investigated the situation at Kohler, Wisconsin, I found that the workers at work after the strike were getting more money than they got during the period before the strike when Governor Kohler employed the ‘spread the work’ system.

Every artificial effort to maintain a universal high wage scale unrelated to national income has failed, because it is necessary first to have the market, then to increase prices, — that is, national income, — and finally to increase wages — that is, the labor share of national income. The market will not be restored until prices come within the earning range of the present consumers. That means a lower price than 1929 and therefore a lower wage. It is difficult to make men step back one step so that they can eventually move forward two steps, as Lenin once told Soviet Russia.

After all, what is the principal objective of the worker? Is it not to find economic and social security for himself and his family? It is the terrifying uncertainty rather than the amount of the wage rate which is the underlying cause for unrest.

If the worker knows what he gets annually or even monthly, he has security. He can cut his cloth accordingly. To-day, too large a number of American workers are speculators, hoping that their working season will prolong itself and that obligations during the off periods will somehow be met. As long as wages are based on the time scale per hour or per day and remain high in relation to national income, this condition will continue. When a worker gets a yearly job and works on that basis without regard to fantastically high hourly wage scales, industry will be remodeled to avoid seasonal layoffs. No greater benefit socially can come to labor.

VI

The question often arises as to whether the wage shall be all-inclusive or whether, out of operations or out of wages, the worker shall be given benefits tending toward social security. In some industries like the Ford Company, the total payment is the wage; in others there are numerous benefits which come either out of operations, out of wages, or out of both. No matter what scheme the bookkeepers employ, the money must come out of income, and affects prices and profits and the continuity of operations.

No system of wages should, under capitalism, be without some incentive factor. For many years American corporations have been experimenting with a bonus system, often called profit sharing. There have been many plans — bonuses, insurance, stock purchases, and so forth. Actually, they all come to the same thing — namely, either an additional sum is set aside under operations for incentive wages, or profits are divided between capital and labor. The first known plan was tried in 1794 by Albert Gallatin in his glass works, and many plans are now at work. Some are successful; many have failed.

The theory of profit sharing as an incentive wage is sound; the practice is difficult, first because the system is unregulated and therefore may be abandoned, leaving the workers without the money they assumed they had already gained; secondly, because there is no universal accountancy law in this country, and therefore employers have the opportunity to be dishonest and laborers often distrust even honest employers; finally, because the worker often accepts the incentive wage as part of his fixed wage and refuses to regard it as something apart, to be taken out of profits. In a word, the psychology of both employer and worker is often against the successful operation of profit sharing. Yet, where it has succeeded, it has increased the worker’s earnings, given him the additional annual sum which provides for the future, and improved the relations between capital and labor.

But there must be absolute honesty in accounting, and absolute understanding that the bonus is not a wage but a profit. Organized labor usually opposes this form of workers’ income because it ties the worker to the industry rather than to the union. Yet, is that not nationally more beneficial? Even in Soviet Russia every device has been employed to stimulate workers’ interest in particular industries, even in particular shops. Why not here, in the United States? The worker who has an honestly computed interest in the profits of a business, who is assured an annual wage, will not be tricked by inflated wage scales which really do not increase the amount of money that his wife has to spend. He will not argue about yardsticks; he will be interested in what he and his employer can earn out of their joint productivity. This is a surer method for increasing national income than easy solutions which seem to keep wages up for those who are actually employed for a part of a year, but which do not find wages for the millions still unemployed.

When the wage problem is analyzed objectively to find a formula which will make for a more successful operation of our economic system, it becomes evident that justice and efficiency indicate a wage related to prices and so to national income, maintaining the American standard of living, yet not excluding adequate profits — wages to be paid on an annual basis, with an additional incentive wage out of profits when they exist. Here is a balanced system making for activity in the market place; and out of that activity comes increasing money to all gainfully occupied.