be depriving them of an opportunity to cross-examine him or to question him. I withdraw my request for an executive session tomorrow morning in order to let the other members of the committee question Dr. Lubin, in view of the tremendous importance of this testimony. (There was a discussion as to the procedure of the committee, after which the following occurred :) Mr. GORE. I would like to have the doctor read the bill and give us a statement as to what are the mistakes in those provisions. I do not claim that it is perfect legislation, but it is an approach to the problem.1 Mr. PATMAN. And if the ceiling on the wages becomes the floor, how much would that increase the cost of production in this country? Dr. LUBIN. Very well. The CHAIRMAN. We will adjourn until tomorrow morning at 10. (Thereupon, at 4:55 p. m., an adjournment was taken until tomorrow, Thursday, October 16, 1941, at 10 a. m.) (The following was submitted for the record :) Hon. HENRY B. STEAGALL, DEPARTMENT OF LABOR, Chairman, Committee on Banking and Currency, House of Representatives, Washington, D. C. DEAR CONGRESSMAN STEAGALL: Enclosed are two copies of a statement answering certain questions regarding my testimony before your committee as submitted by Congressman Crawford. These questions were submitted in writing. They relate to the testimony on October 14 and 15 on the price-control bill (H. R. 5479). Yours very sincerely, ISADOR LUBIN, Commissioner of Labor Statistics. QUESTIONS FOR DR. LUBIN, RE PRICE CONTROL BILL, BY REPRESENTATIVE FRED L. CRAWFORD (1) In reading over your testimony I find that you are contending that in the average manufacturing industry, 40 percent of its costs are in the form of directly paid wages (p. 1847). In manufactured products ready for final sale you acknowledge, however, that about 67 percent of accumulated costs has been in paid wages (p. 1889). Let me ask, in that part of costs which has not been paid in wages by employers, might there not be a considerable element of labor-cost which was self-employed, as in producing the raw materials of the farm? Then 33 percent would be an overestimate of the nonlabor costs involved in the final product, would it not? (2) Would you contend that wage rates had not become a factor in advancing costs and prices, when overtime rates come into play? Did you not so contend on page 1841 of your statement? (3) Would you argue that the 3 percent advance in wage rates occurring prior to the defense effort bore no relation to the subsequent 4 percent rise in prices (p. 1843)? Do you argue that wage costs must coincide in time with prices to prove correlation? If not, why have you cited lack of such coincidence (p. 1841)? Do you not shift to arguing, in the case of relatively low wage increases in factory production (p. 1844), that coincidence must be shown in particular industries and in time, in order to establish a relation between wage levels and prices? (The correlations cited seem to me irrelevant to the problem of wages in an inflationary spiral which we are considering. This problem is a matter, not of cure as you imply by your answer to the chairman on page 1851, but of pre 1 See pp. 2035-2042, infra, for Dr. Lubin's statement; pp. 2043-2067 for Mr. Gore's statement. vention by way of anticipating an abnormal, inflationary situation.) (4) Does it follow that because prices normally rise for other reasons than inflationary wage rises, that the latter are not a characteristic element of an inflationary spiral? If wages should rise with the cost of living as you contend and as has been provided in Canadian regulations, by the same token should not the cost of living rise with wages? If not, what measures or influences should bear on the situation so as to alter the relation and change real wage rates? In time of war should these rates rise or fall? (5) You have contended that industrial property should get enough out of industrial income as a whole to keep investors interested, that is, to keep the industry alive (p. 1853). You have indicated that differential wage rates exist which tend to make this margin a critical one (p. 1868). Under these circumstances, if wages rise prices must rise, must they not, as a rule? (6) But you have argued that wages have not added to costs so as to be responsible for rising prices (pp. 1841-1844) and will not so add to costs (p. 1851 and bottom p. 1857). Are you arguing that since manufacturing has but 40 percent wage costs, there cannot be, in advances in wages, any basis for advancing prices at the same rate that wages may have been advanced? That a 10 percent wage raise would bring only a 4 percent rise in total cost and therefore justify only a 4 percent price increase, at most? Are you concluding (as at the bottom of p. 1846 et seq.) that since this rule applies on the average to each manufacturing industry, therefore, it applies to all manufacturing industry in the relation of costs to prices? (7) While acknowledging (p. 1844) that “any * 10-cent wage increase * * * may lead to some rise in prices," you nevertheless argue that "it was possible to pay the cost of the initial wage advance without raising prices" because "there was a sufficient surplus in the form of profits" (p. 1843). On what grounds do you justify the idea that profits are a "surplus" that is not to be reckoned as a cost element in prices? Have you not reiterated this belief in citing figures on output per man-hour against wage increases and alleging that "the effect" of wages upon costs-"would have been nil" (p. 1846)? Do you hold that costs should control values, or that values should control costs, in a laissez faire, competitive system? (8) With increased technological efficiency or any other lowering of costs, would you contend that, if wages are not advanced to absorb this saving, then prices ought to be lowered so that in either case the wage earner's purchasing power, or standard of living, is increased? Is this what you have termed "ideal" at the bottom of page 1868? Would you hold that, since if a man's money bought more goods he would be better off, we should all benefit and it would be a social gain if prices were lower? How about the effect of increasing rent on land as an element in costs which would prevent, and does prevent, prices from falling with reduced costs (or as an element that absorbs price rises as other costs, than rent, are reduced)? (9) I gather that you feel that it is a social gain to raise the wage earner's standard of living continually by increasing the proportion of the national income which wage earners obtain by collective bargaining; that is, wherever the profit margin is high enough to make higher wages possible (pp. 1843 and 1849) the proportion of income which wages get and use as purchasing power should become greater. Would you agree with Mr. Ralph Hetzel, who has represented Mr. Phillip Murray of the Congress of Industrial Organizations in these hearings, when he stated (p. 1591, top) that it was his opinion that with technological progress a decreasing proportion of production is to be attributed to labor and an increasing proportion to capital? How can you reconcile the contention that labor should seek an increasing proportion of the national income with Mr. Hetzel's analysis of the naturally declining proportion of labor's productivity, without abandoning a laissez faire policy? (10) May I illustrate my meaning with a concrete example? Let's suppose that a wage earner has a thrifty wife with a large family. They are able to save enough to do some investing for a rainy-day income, largely because he invents some improvements for which his company rewards him. But he dies before his family has grown up and they become dependent for their standard of living on the rainy-day capital of the company he had helped make profitable. As its profits and dividends rise, their standard of living rises along with that of thousands of other small investors like them. The company is big and growing bigger in its income; but the investors may be, and most of them are. small. But this family no longer has any wage earners. Is it your contention that such a family should not have a standard of living that is protected in its property rights against the so-called “human rights" of living wage earners who are on strike and seeking to raise their standard of living at the investor's expense? Where, and how, would you draw the line? Would you permit coercive picketing to draw that line, or substitute Government grants of wage raises to avoid violence and interruption of production by such picketing? (11) If it be true that, as has been acknowledged by every witness except yourself, that monetary or credit controls not now in our laws are essential to control of inflation, then if we accept your idea (pp. 1913-1914) that the amount of direct governmental interference in industry should increase relative to the needs that become superficially apparent (while failing to provide for credit control), would we not be forced to adopt even tyrannical authoritarian controls for which this price-control bill is but an entering wedge, in a futile attempt to control inflation? (12) Is it not a fact that you have actually employed a fallacy in contending that a 10-percent rise in wages adds only 4 percent to costs and so to prices based on costs, namely, the fallacy of composition? Is it not true that this 4 percent becomes cumulative wherever there is any interdependence between industries, as in transportation costs for example, and cannot be employed without considering the accumulation rather than the particular ratio of wages to industrial costs as a matter of averaging (that is, at 4 percent of all costs)? If Canada, for example, prohibits strikes for wages but provides that they must be raised all round for every rise in the cost of living, then if some costs have risen previous to the base or dead-line period and prices rise while profits are kept in leash by taxation, is it not obvious that she is providing, not against, but for inflation by raising wages to sustain real income at its hourly level, inasmuch as a small rise in wage rates accumulates into a large increment in final costs and so lays the ground for another step-up in cost of living and another rise in wages and so on indefinitely? (13) In short, if labor is to share in the sacrifices that go with an all-out defense effort, is it not impossible that real wage rates can be sustained, particularly among those organized groups with higher rates of pay and a close relation to the needs of mechanized warfare? Will not labor have to depend for its standards, and especially for the security of its income in this emergency, on continuous employment rather than on high rates of pay per hour? SUPPLEMENTARY STATEMENT OF ISADOR LUBIN IN RESPONSE TO QUESTIONS OF REPRESENTATIVE FRED L. CRAWFORD 1. RATIO OF WAGES TO VALUE OF MANUFACTURES AND NATIONAL INCOME The 40-percent ratio, used in the testimony on H. R. 5479 (p. 1847), represents the proportion of wages paid by manufacturing industry to the total value added by manufacture. This ratio was appropriate to the discussion of the trend of factory wages to the trend of the prices of manufactured goods. The 67-percent ratio, used by Mr. Henderson and confirmed by me (p. 1889), represents the proportion of the total of all wages and all salaries to the total national income. The item of salaries includes a significant proportion of high salaries that represent profit sharing, in addition to payments for labor. The remainder of the national income is classified as rents and royalties, interest, dividends, and entrepreneurial withdrawals. There is some payment for labor included in these totals, as in the case of the farmer, but no wage payments, of course. Thus 33 percent is an underestimate of total nonlabor costs, but it is, at the same time, a substantial understatement of income other than wages. 2. COSTS OF OVERTIME PAY The payment of premium rates for overtime work undoubtedly tends to increase the costs of manufacture over what costs would be were the same number of hours worked at straight time. In most cases, however, the reduction of overhead and other fixed costs per unit has been greater than that involved in the addition to costs because of overtime payments. Hence that part of the rise in hourly earnings which is attributed to extended use of overtime hours (p. 1841) can hardly be regarded as a cause of increased prices. Furthermore, there is serious danger that productivity might drop, with a consequent rise in labor cost, if we simultaneously extended hours and removed premium rates. British and other experience indicates the wisdom of retaining overtime rates. 3. TIMING OF WAGE AND PRICE CHANGES The 4-percent increase in wholesale prices (pp. 1841-1843) occurred over the year. March 1940 to March 1941, when wage rates were rising by less than one-third of 1 percent. This 12-month period consisted of the latter portion of the 21 months, June 1939 to March 1941, during which hourly earnings rose by 5.5 percent and wage rates roseb y an average of about 41⁄2 percent. These two periods were selected for two different purposes. The period of 21 months was used to illustrate the very slight increase in wage rates prior to March 1941 and to illustrate the distinction between movements of wage rates and hourly earnings. The 12-month period, March 1940-41, was used to show how prices continued to advance after the initial flurry in September 1939, while wage rates remained relatively stable. Neither of these periods was used to measure the exact responsibility of wage-rate increases for the rise in wholesale prices. Before any such comparisons could be made, there had to be an allowance for the rising productivity of labor (p. 1846), the proportion of labor cost to price (p. 1847) and for the kinds of wholesale prices that may be appropriately compared with wages in manufacturing industry (p. 1847). In general, any wage-change may have some relationship to price changes. However, it is surely relevant to observe that sharp increases in wholesale prices occurred in advance of any substantial increase in wages. For the years 1939 and 1940 it would be difficult to argue that prices rose because wages were expected to rise. Prices rose immediately on the outbreak of war while wages remained relatively stable. This situation was, admittedly, somewhat different after March 1941 because some substantial increases in wage rates had then begun to take place. For this reason, attention was given to the extreme possibility that some of the recent price advances might have been due to anticipated wage increases (pp. 1847-1848). It was shown, even on this assumption, that the price increases which have already occurred have been sufficient, on the average, to cover the cost of considerable wage increases which have not yet occurred. The distinction between the "cure" and the "prevention" of threatened evils is not clear. We are faced with the fact of a sharp upward trend of wholesale prices that cannot be explained in terms of any increased cost of industrial wages. The power to prevent the continuation of such a situation can be described, alternatively, as a cure for our present difficulties or as a measure of prevention of evils yet to come. 4. CHARACTERISTICS OF AN INFLATIONARY SPIRAL During an inflationary spiral, there is a rise in all kinds of prices, but these various prices rise at very different rates. Once inflationary wage increases occur, these may be cited as one of the many characteristic elements of infla tion. Wage increases are, however, typically preceded by increases in the more dynamic prices, particularly in the wholesale prices of basic commodities and by increases in profits. The cost of living usually rises more slowly than wholesale prices. If money wages do not rise as rapidly as the cost of living, real wages will fall. In this sense, "wages should rise with the cost of living." However, the apparent converse of this statement, namely that "the cost of living should rise with wages" simply is not true as a general proposition. For example, wages rose from 1926 to 1929 while the cost of living fell. The influences which alter the relation between wages and the cost of living are: (a) The productivity of labor; (b) the prices of goods and services; and (c) the costs and profits of all those who manufacture the goods or provide the services which wage earners buy. The wages of labor constitute one of these elements of cost, but it does not seem to follow that the prices of the items that workers buy should or will rise in proportion to the increase in the wages paid to industrial labor. There is no general answer to the question as to whether real wages should rise or fall in time of war. Under conditions of rising productivity and a stable 1 price level, the general average of wages should rise. Under other conditions real wage rates will fall, whether they "should" or not. 5. WAGE DIFFERENTIALS IN RELATION TO INDUSTRIAL PROFITS A sufficient return should be left to the owners of property to make investment attractive to them in whatever facilities are required for any given desired output (ct. p. 1853). Differences in wages do exist (p. 1868) and this fact is one of the reasons why the freezing of wage rates would be difficult to administer. A rise of wages that would wipe out all prospects of return to the owners of the facilities needed for national defense would lead to a need for higher prices on the output of those particular facilities. However, it does not follow that "if wages rise, prices must rise." Wages may rise in plants or in companies which are earning or promise to be earning a net return which is more than sufficient to keep their facilities in production. 6. WAGE AND PRICE INCREASES IN PARTICULAR INDUSTRIES It is clear that wage-rate increases in manufacturing industry have not added sufficiently to costs as to account for the price increases that actually occurred from June 1939 to July 1941 (pp. 1841-1844). No contention was made that the actual wage increases during this period would not increase costs at all. Rather the contention was made that the rise in prices which had actually occurred was sufficient, not only to cover the costs of the actual wage increases, on the average, but also sufficient to cover the cost of considerable wage increases in the future without any further rise in prices (p. 1851 and bottom of p. 1857). No statement was made in the testimony under consideration to the effect that there could be no basis for price advances at the same rate as the rate of wage increases. The statement was made that the cost of a 10-percent rise in the wage rates paid by manufacturing industry would be covered, on the average by a 4-percent rise in the prices of manufactured goods (p. 1846 et seq.). This proposition does not apply to each industry or establishment, considered separately, for the ratio would vary from case to case. In the shoe manufacturing industry, for example, the cost of a 10-percent wage increase would be offset by a 22-percent rise in manufacturers' sale prices (ct. p. 1847). The general proposition applies to all manufacturing industry, on the average, but not in the same degree to each industry or to each establishment. 7. INFLUENCE OF COST AND DEMAND UPON PRICE In a freely competitive market, both costs and demand (not "values") control prices. The price of any article tends to settle at the point where the cost of the most expensive unit added to the supply is equal to the price at which that unit will be demanded. The cost (technically termed "marginal unit cost") includes a sufficient return to owners and enterprises to draw out the total supply that is sold at the price in question. A famous economist (Alfred Marshall) has said that there is no more use in debating whether cost or demand controls price than there is in debating which blade of the shears cuts the paper. At the same time the profits of any one enterprise may be greater or less than the amount required to attract investment and enterprise. If the profits are greater than the required amount, there is a true "surplus." The statistical materials indicate that considerable surpluses of this type did exist in the recent period before wages began to rise substantially (p. 1843). The existence of such surpluses is confirmed by the rise in aggregate profits after 1939 and by the fact that the initial wage increases did not require further price increases. A wage increase that was merely equivalent to the increase in man-hour productivity would leave profits at the former level, even if sale prices remained stable. In this sense the effect of the net wage increases from 1937 to 1940 "would have been nil," on the average. 8. WAGE INCREASES VERSUS PRICE REDUCTION Once profits have reached a level that is sufficient to bring forth the necessary supplies, any further increase in profits may be absorbed by an increase in wages, a lowering of prices or an increase in tax collections. The choice between these three measures depends on the particular circumstances. If it |