An Index of Wage Rates for Selected Industries, 1946-1957

Abstract

COLLECTIVE bargaining results in the periodic negotiation of a structure of wage rates and of other conditions of employment. Variation in the structure may be thought of as a step function through time constant between the effective dates of bargained changes and rising or falling discretely on those dates. As illustrated below, the level of wages shifts at times t, t + I, and t + 2 and is otherwise constant. It is these shifts that economists Wage_Iordinarily think of as changes in the price of labor to the employing t t + I t + 2 firm. Time Because average earnings data are more readily available than are wage rate data, students of wage problems have often been forced to rely upon earnings as a measure of the price of labor. This measure, of course, reflects not only changes in basic wage rates but also changes in the distribution of workers throughout a given wage structure. For example, if at some time an industry increases its employment of highly paid, skilled workers, average hourly earnings will rise. But is such a rise to be interpreted as a rise in the price per unit of labor? The answer would appear to be no, if we rely upon deductions from the theory of the firm. Starting from an equilibrium situation, a firm that increases its employment of a factor is most likely responding to a rise in the derived demand for that factor's services. The derived demand may have risen because of changes in marginal physical product, the price of the product, the prices of other factors, and so forth.' Just as a change in the proportion of more highly paid workers will cause a rise in average hourly earnings while basic rates of pay remain unchanged, so, too, will other variations in the composition of the work force. Studies of the Bureau of Labor Statistics 2 cite the following additional influences that tend to raise earnings: increases in the proportion of workers who are male, who work in high-wage regions (e.g., the North and the Northwest), who are employed in more densely populated urban areas, who work at premium rates, and who are paid according to an incentive or piece-rate system. Variations in some of these influences are not so easily interpreted by applying microeconomic theory as is an increase in the employment of a single factor, assumed homogeneous. Thus, for example, if a firm opens a plant in the low-wage area of the country, thereby decreasing the average earnings of all its workers, should this be interpreted as an increase in the average supply of labor as a whole or as an increase in the demand for labor of a particular grade? Or is this the discovery of a resource that justifies our speaking of a different production function? We may say that the answers to these questions depend in part upon what was in the mind of the entrepreneur who decided on opening the new plant. But this does not carry our analysis far until we know what was in his mind. Fortunately, for the purposes of this paper we need not define unequivocally the theoretical meaning of such changes as those discussed. It is enough to remark that many investigators of wage movements have found it necessary to * I am indebted to Leonard S. Rhynus, Susan Crittenden, and Terry Allen for help in assembling materials for this study. The companies and unions included here were generous in answering detailed questions about their negotiations. Financial aid was received from Wesleyan University and from the Research Committee for Public Affairs at Wesleyan, a committee charged with allocating funds from a Ford Foundation grant. Philip Brown processed the data for the wage rate index. William Barber, Harry Douty, Melvin Lurie, and several economists in industry offered valuable comments on an earlier draft of this paper. Any errors in the work are, of course, my own. 1 While the foregoing is thought to be a fair general interpretation of employment changes, it is not meant to preclude the cases wherein union work rules can compel an increase in demand. In such cases, indeed, supply (pressure) creates its own demand! 2 Harry Douty, Union and Nonunion Wages, in W. S. Woytinsky and Associates, Employment and Wages in the United States (New York, I953), 493-50I.