Labor's New Victory: Threat or Promise?

by SUMNER H. SLICHTER

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No SETTLEMENT in union-employer negotiations since the dramatic agreement of 1937 between John L. Lewis and the United States Steel Corporation has aroused so much comment from editors, economists, and business leaders as the recent agreements between the United Automobile Workers and Ford and General Motors. Although the provision for the payment of supplementary unemployment compensation represents only one third of the cost of the companies’ concessions, it is this feature of the agreements that is entirely responsible for the widespread comment.

The president of the National Association of Manufacturers charged that agreements to pay men for not working “could have seriously damaging effects on the American economy, perhaps leading to a socialistic state and a controlled economy,”and the N.A.M. called an emergency conference to discuss the danger. Many papers and some economists questioned whether small employers would be able to do what Ford and General Motors are doing and suggested that small companies would be squeezed out of existence and the concentration of industry accentuated. Still others asserted that the higher labor costs represented by supplementary unemployment compensation would start an inflationary spiral of costs and prices.

A few commentators forecast that such payments would accelerate “automation” — taking it for granted that this would be bad. Many businessmen expressed the fear that employees would be discouraged from working. A frequently expressed fear was the possibility that supplementary unemployment compensation would lead managers to plan less boldly for expansion that, in the words of the Baltimore Sun, the characteristic adventurousness of American industry would fade away.

Supporters of the Ford and General Motors agreements are as numerous as the critics. The agreements have been hailed as evidence of the ability of American employers and unions to defy tradition, to work out their own arrangements for dealing with problems by bargaining — a method superior to the European practice of relying upon social legislation. A thoughtful article in the Christian Science Monitor described the Ford agreement as proving “that labor and industry are working out a new social system in the United States.” Supporters of the new agreements stress their influence in encouraging managements to work out more stable year-round production schedules, and argue that additional unemployment compensation, by helping to maintain the demand for goods in periods of business recession, will strengthen the resistance of the economy to contraction.

both the critics and the supporters of the FordGeneral Motors agreements assume that provision for supplementary unemployment benefits will be added to many union-employer contracts during the next few years — just as supplementary pension schemes spread rapidly after the precedent-setting agreements in the steel industry in 1949. This assumption is correct, subject to the important qualification that these unemployment benefits will meet far more resistance from employers than supplementary pensions and thus will spread more slowly. But if there is a considerable spread of supplementary unemployment compensation, what will be the results to business and the economy and who will turn out to be right — the critics or the supporters of the Ford-General Motors agreements? Before attempting to answer these questions, let us see briefly what the agreements provide.

The agreements are long and detailed because they cover many technical points. In essence, however, both Ford and General Motors have agreed to contribute 5 cents for each hour worked by hourly-rated employees to a trust fund from which supplementary unemployment compensation shall be paid. No matter how small the amount in the trust funds, the obligation of the companies to make contributions shall not exceed 5 cents an hour. Furthermore, when the funds exceed a certain size in relation to the number of employees, the contributions of the employer are to cease.

The payments will not begin until June 1, 1956. After that date employees with at least one year’s seniority who are laid off will be paid supplementary benefits sufficient, when added to state unemployment compensation, to give them 65 per cent of their weekly after-tax straight-time wage for the first four weeks of unemployment, usually after a one-week waiting period, and 60 per cent for the next twenty-two weeks, but in no event less than $25 a week. After twenty-six weeks the employees shall cease to draw supplementary unemployment benefits. Since the average benefits under state unemployment compensation schemes have been only about 35 per cent of average straight-time earnings after taxes, the Ford and General Motors schemes nearly double the unemployment compensation received by the employees of those companies.

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ARE the Ford and General Motors agreements a radical innovation in industrial relations embodying an important new principle: namely, that employers have an obligation for the welfare of workmen whom they lay off? I think not. The very fact that the Ford and General Motors agreements provide only for supplementary unemployment benefits shows that they were not setting up a new principle. The new principle that employers have the duty to provide income for laid-off employees was established first by the state of Wisconsin in 1932 when it set up a state scheme of employer-financed unemployment compensation, and later by the federal government in 1935 when Congress, through a special payroll tax, virtually forced the states to set up unemployment compensation schemes. The Ford and General Motors agreements simply attempt to make up for the inadequacy of benefits under the state laws — an inadequacy that was pointed out by President Eisenhower in his economic reports for 1953 and 1554.

Will the spread of agreements of the Ford and General Motors type squeeze the small and less successful employers out of business? No criticism of the Ford and General Motors agreements has been made more frequently than this one. The charge naïvely assumes that large concerns are better able to keep down layoffs than small concerns. The spread of the Ford-General Motors type of agreement would obviously help those companies which are best at keeping the number of layoffs low in relation to the number of workers on the payroll. This means that the Ford-General Motors type of agreement, if widely adopted, would confer advantages 1) on those companies which are growing rapidly and 2) on those which are good at limiting the seasonal and cyclical fluctuations in their output. The agreements would add to the difficulties of the enterprises which for any reason are not able to keep layoffs low — firms in declining industries or high-cost and inefficient companies.

In short, the spread of unemployment compensation agreements would help the most efficient companies (large or small) and all enterprises in expanding industries and would hurt the less efficient concerns and all firms in contracting industries. In some industries success in keeping down layoffs may be associated with largeness, in other industries with smallness, and in still other industries it may be quite independent of size. Hence, it is wrong to suggest as a broad generalization that the widespread adoption of unemployment pay will tend to squeeze out the “little fellow.”

The extent to which the spread of supplementary unemployment compensation tends to concentrate production and employment in the hands of those firms (large or small) that are best at keeping down layoffs will depend upon the bargaining policy of unions. Unions must decide whether to insist on different rates of contribution to the trust funds by different employers in order to make possible the same scale and duration of supplementary benefits regardless of the employer’s layoff rate, or whether to accept differences in the scale and duration of unemployment pay in order to keep uniform the contribution rates of different employers.

Long experience has taught unions that they get into trouble both with employers and with their own members if they go very far in imposing more onerous terms on some concerns among a group of competitors than on other enterprises in the group. Hence, one is reasonably safe in predicting that unions will not. vary the rate of contributions made by various competing employers. It follows that the spread of the Ford-General Motors type of agreement would have only a moderate tendency to concentrate production in the hands of firms that are best at keeping down layoffs. Some advantage, however, would still accrue to the firms with low layoff rates because contributions are made by the employer to the trust fund only when the fund is less than a specified ratio to payrolls. The lower the layoff rate, the smaller the proportion of the time that the employer would be contributing.

The tendency for the spread of the Ford-General Motors type of agreement to concentrate production in the firms with the lowest layoff rates will be limited by the fact that unions will not be able to negotiate such agreements with the very weakest firms and in the declining industries where the shrinkage of employment has been greatest. Thus the failure of supplementary unemployment compensation to extend to some of the weakest and least efficient, firms will help those firms to survive.

Will the spread of the Ford-General Motors type of agreement encourage the use of machines to run machines — so-called automation? The answer to this question is “Yes.” Hand methods have the advantage over machine methods, from the standpoint of employers, that they entail fewer fixed costs. When business falls off, the employer who uses hand methods can get rid of a considerable part of his payroll by dropping men, but most machine costs (interest on the investment, depreciation, obsolescence, insurance) go on whether or not the machine is running. Unemployment pay makes hand-method costs more like machine-method costs because it lessens the savings that employers achieve in slack times by making layoffs. To that extent, supplementary unemployment compensation will encourage the shift to machine methods.

But so strong are the present incentives for employers to shift to machine methods that the practical effect of the spread of supplementary unemployment compensation will be small. Cutting tools in recent years have become so efficient that slow and cumbersome hand methods of loading and unloading machines greatly limit machine capacity and keep machines idle a large part of the time. Hence, enormous gains are to be made from the development of 1) machines for loading and unloading other machines and 2) machines that perform several operations on a part without being reloaded. Unemployment pay would add only a small amount to the gains from automation.

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WILL the spread of the Ford-General Motors type of agreement add substantially to the stability of the economy by increasing the incomes of unemployed workers during recessions? A moderate gain in stability may be expected. Obviously, the laidoff workers who receive supplementary unemployment compensation will be greatly helped in maintaining their demand for goods since, as I have pointed out, their unemployment benefits will be almost doubled. But the effect of the supplementary unemployment compensation will be limited by the fact that, even after it has spread to the fullest practicable extent, it will reach only a small fraction of all employees. It will not extend to any important degree beyond union members, of whom there are about 16 million in private industry. But many union members are in industries in which for one reason or another it is either not necessary or not feasible to negotiate supplementary unemployment benefits. Hence, unless union membership grows quite rapidly in the next few years, supplementary unemployment compensation is not likely to cover more than about 10 million workers, less than one fourth of the non-agricultural employees in American industry and only about one fourth the number covered by the various government unemployment compensation schemes.

On the other hand, supplementary unemployment compensation agreements are likely to be concentrated in manufacturing, mining, transportation, and construction — the industries in which the cyclical ups and downs of employment are greatest. Hence, even if supplementary unemployment compensation covers less than one fourth of the non-farm employees, it will raise the incomes of a much higher proportion of the unemployed.

What substance is there to the charges that unemployment pay will make men unwilling to work and that it will be an important inflationary influence in the economy? Paying men unemployment benefits of 60 per cent or 65 per cent (or even 75 per cent) of their straight-time earnings after taxes is not likely to deter many men from working. In the first place, wives do not care to have idle husbands around the house when jobs are available, and the influence of the wives is not to be overlooked.

In the second place, consumption in the United States is rather competitive, and the family with only 65 per cent of its usual income after taxes cannot live in the way that it has been accustomed to live and in the way that the neighbors are living. A drop of 35 per cent in income means postponing the buying of many things that the family would like to have, cutting down on recreation and trips, and perhaps changing plans for the education of children. People who fear that American workers will be content with $50 or $60 a week unemployment benefits when jobs are to be had paying $20 or $30 a week more are not aware of the enormous unfilled wants of most families.

To the extent that unemployment pay sustains incomes in periods of recession and thus limits the drop in the demand for goods that accompanies recessions, it will be an inflationary influence. In fact, any arrangement that limits the severity of recessions is inflationary because such arrangements tend to prevent prices from falling sufficiently during recessions to offset the rise in prices that accompanies most booms. But supplementary unemployment compensation will not be a major influence determining the long-run movement of the price level in the United States.

Since various anti-recession measures (of which supplementary unemployment compensation is only one) will prevent much of a drop in the price level during recessions, the long-run movement of prices will depend upon how much prices rise during booms. The principal determinants of the movement of prices during booms will be 1) the strength of trade unions, 2) the willingness and ability of employers to resist the demands of unions, and 3) the rate of technological change. These three conditions will determine the movement of labor costs to which the price level must adjust itself.

A widely expressed fear is dial unemployment pay will weaken the spirit of adventure that has always characterized American industry. If adding new employees to the payroll imposes heavy obligations on the employer, will not enterprises be reluctant to expand?

This argument is without merit. Employers who have orders or who expect orders are going to hire enough employees to fill them. Failure to receive good service would cause customers to take their business elsewhere. It would take a very high rate of unemployment benefits to make employers prefer to lose customers rather than to add workers who may be needed only temporarily.

In two ways the spread of more liberal unemployment pay will encourage industry to expand. Jn the first place, as I have pointed out, the broad adoption of the scheme will confer advantages on the firms that through expansion and other means are able to keep down the rate of layoffs. In the second place, to the extent that supplementary unemployment benefits limit the severity of recessions they reduce the risks of expansion. On the whole, one must conclude that the widespread adoption of supplementary unemployment compensation would strengthen rather than weaken the dynamic influences in the American economy.

Up to this point the survey of the pros and cons yields a verdict in favor of agreements of the FordGeneral Motors type. Such agreements, if widely adopted, would tend to concentrate production and employment a little more in the enterprises (large or small) which are most efficient, would stimulate in small measure the spread of automation (surely a desirable result), would add modestly to the resistance of the economy against recessions, and would stimulate moderately the expansion of industry. The fears that generous unemployment benefits would undermine men’s willingness to work do not seem to be well founded. To a small extent supplementary unemployment compensation would be an inflationary influence, but this criticism can be made of any arrangement or policy which mitigates the severity of recessions.

But I have yet to present the most important criticism of supplementary unemployment pay. It is a criticism which, despite its importance, is rarely made either by employers or by union leaders. The criticism is that supplementary unemployment compensation, even if widely adopted, is not a satisfactory substitute for adequate normal unemployment benefits. In other words, it does not give the country what it needs — an adequate system of unemployment compensation.

I have pointed out that, at the best, supplementary unemployment compensation agreements could be expected to reach only about one out of four of the workers now covered by government unemployment compensation schemes. Furthermore, in the very spots where unemployment is most serious, in declining industries and among weak firms, unions will have the greatest difficulty in negotiating agreements of the Ford-General Motors type.

There is no doubt that the unemployment benefits provided by the present state unemployment compensation laws are inadequate. President Eisenhower in his last economic report pointed out that the ratio of benefits to the average weekly wages of covered employees is only 34 per cent — in some states below 30 per cent. Back in 1938 the ratio was 43 per cent. President Eisenhower recommended that benefits be raised so that the great majority of covered workers will be eligible for payments that are at least half their regular earnings, He also recommended broadening the coverage of these laws.

President Eisenhower’s recommendations received far less publicity than the Ford-General Motors agreements; yet their adoption would do far more to give the country an adequate system of unemployment compensation than can be expected from the spread of supplementary unemployment compensation. Undoubtedly, the provisions in the Ford-General Motors agreements calling for total unemployment benefits (regular and supplementary) equal to 65 per cent of wages after taxes for the first four weeks will help the state legislatures raise their conception of what are “adequate’ benefits. Surely President Eisenhower’s recommendation of half of “regular earnings” is too low — though not far below 60 per cent of straighttime earnings after taxes as provided in the FordGeneral Motors agreements between the fifth and the twenty-sixth weeks of benefits.

An important characteristic of an adequate scheme of unemployment compensation is that it costs loss than nothing — it is an asset to the community, not a burden. The test of whether any economic or political arrangement is a burden or an asset is whet her it tends to add to or to subtract from production — whether it makes for a higher or a lower standard of consumption. Adequate unemployment compensation, if properly managed, does not subtract from production and consumption in times of boom, and it does help check the drop in production and employment in times of recession. Hence, over the entire business cycle it tends to increase production and consumption.

An adequate system of unemployment compensation would not only add to the security of workers — it would also add to‘the security of business enterprises and would enhance the value of the investment in American industry and the value of every farm. It is amazing that the businessmen and farmers have not sought to stabilize their markets by insisting that the government provide an adequate system of unemployment compensation.