Dr. TAYLOR. You would be saying people were to get less purchasing power as you went along. The only real problem is at what date you relate them. What is the fair and equitable time to begin that relationship? There are some discussions now underway with respect to that. I think it boils down pretty much to this: If you go back and say we will relate wages to cost of living as of January 1950, for example, you say that that relationship will be preserved even though a higher real wage was bargained in a more recent collective-bargaining agreement. It seems to me that we have to determine whether or not that is the date to start relating it or the date of the last free collective-bargaining agreement. The last freely collective

Senator BENTON. You haven't decided this yet and it is under discussion?

Dr. TAYLOR. That is right. It is under discussion. Actually the escalator relates the wages with the cost of living as of the contract date. It seems to me that if we approve escalator clauses as they are written, we must for other people in the country give nondiscriminatory treatment in tying them in. So the discussions which are going on are rather technical, not on the basic question about whether wages should be stabilized by relating them to the cost of living, but how and as of what date. They are technical problems.

Senator BENTON. I do not know that I would call them technical or not. They are certainly acute and critical.

Dr. TAYLOR. Indeed they are. If you sat in my chair you would realize the great truth of that statement.

The CHAIRMAN. Any further questions, gentlemen?

Senator CAPEHART. Do you think this committee might well write an escalator formula and place it in this law?

Dr. TAYLOR. I don't know. It seems to me that that is an operational detail. I would think that if as a national policy wages should be stabilized by a proper relationship with the cost of living, if that is the general policy that is accepted in our country, it seems to me the technical details of how to do it and as of what date could very well be worked out by a group such as ours with labor and management folks on it, rather than going to the specific details here. As you know, in World War II the War Labor Board worked out the Little Steel formula. It having been worked out, it was subsequently approved by the Congress. I should think maybe a procedure like that would be better than the exact matter being initiated by the Congress.

Senator CAPEHART. If we arrived at an index at the moment to start with, X amount, and wages were permitted automatically to retain their relationship to that index, it would not be so tough, would it, to write into the act?

Dr. TAYLOR. I certainly would not want to say that the Congress would not have the right to go into that.

Senator CAPEHART. I know we have the authority and the power to do it, but the question is whether it is in the best interest of the Nation.

Dr. TAYLOR. You know, in wage stabilization when we look ahead to unknown factors, I think you need more flexibility in the wage stabilization rules than would be available with the specification of a rigid formula by law.

Senator CAPEHART. I agree with that. I think maybe that might give flexibility that would permit the employees and the employers to handle matters themselves rather than Washington doing it.

Dr. TAYLOR. I would just say this in general: If such a provision were enacted into law, it should be in general terms certainly and not inflexible.

Senator CAPEHART. It would be an index that you would arrive at and then it would permit wages to reflect a proportion of that index, right around that index.

Dr. TAYLOR. As one who operates in industrial relations I would prefer more flexibility to meet unknown problems. We just don't know what lies ahead.

The CHAIRMAN. Any further questions? If not, Doctor, we want to thank you for your testimony.

(Dr. Taylor's prepared statement follows:)

STATEMENT OF George W. TAYLOR, CHAIRMAN, WAGE STABILIZATION BOARD

There are no proposed amendments to the act peculiarly related to wage stabilization. Rather, I appear before you to urge the extension of title IV so that we may continue to discharge the important stabilization responsibilities assigned to us under it. Likewise, we support the reenactment of title V, relating to the settlement of disputes, so that it will be available if resort to its procedures becomes necessary and justified.

The Wage Stabilization Board was first established as a nine-man tripartite agency on September 9, 1950, by Executive Order 10161, issued by the President under title IV of the Defense Production Act. Mr. Cyrus Ching took leave from the Federal Mediation and Conciliation Service to serve as Chairman of the Board during the initial period of its operations. He has recently returned to his post as Director of the Federal Mediation and Conciliation Service.

As you know, the work of the Wage Stabilization Board came to a virtual standstill when the three labor members withdrew on February 15, 1951. Α complete wage stabilization policy had not then been formulated. Indeed, only the barest beginnings had been made. For a period of about 2 months, management and their employees had to deal with many problems of wage determination not covered at all by the rules which had been laid down. These parties resolved such problems in ways that seemed proper to themselves. As required by law, they submitted their solutions for the approval of the Wage Stabilization Board. It is grossly unfair, in my opinion, to say that in these submissions management and labor simply seek to "break through the ceiling." The fact of the matter is that they had to carry on their wage determination activities in the absence of a clearly defined wage stabilization policy. The many cases that went in to the backlog of the Wage Stabilization Board were, in effect, requests of the parties for the Board to tackle unresolved policy questions.

Only recently, on May 8, 1951, did the Wage Stabilization Board resume its functioning and then as an 18-man tripartite Board with certain limited dispute settlement responsibilities in addition to its wage stabilization duties. The Board was reconstituted by Executive Order 10233, issued on April 21, 1951. For your information, there is attached a copy of this Executive order together with a short biographical sketch of our Board members. The new Board faced the immediate task of acting not upon disputes-there were none before the Board--but upon a large accumulation of wage policy questions raised by managements and by their employees because no rounded wage stabilization program had been available for their guidance.

As just indicated, the responsibilities of the reconstituted Board fall under two headings: (1) Wage stabilization, and (2) settlement of certain types of labor disputes. It is my purpose to discuss each of these responsibilities.

1. Wage stabilization.-At the outset it is important to recall the reasons why wage stabilization is an essential ingredient of the defense mobilization program. Wage stabilization is, of course, only a part of the total mobilization program; but we think it is a highly essential part. On December 18, 1950, in its first official statement, the original Wage Stabilization Board indicated the role of wage controls in the national effort to curb inflation. Representatives of industry, labor, and the public on the Board unanimously agreed that the underlying and

fundamental cause of inflation is the tendency for consumer purchasing power to increase more rapidly than the supply of consumer goods and services. Moreover, no proper claim can be made that direct wage controls can do the whole job of wage stabilization. As the Council of Economic Advisers stressed in its January 1950 report to the President:

"There are factors which will make it extremely difficult to achieve the objective of holding total wages available for spending in line with the availability of consumer goods. The obstacles are fairly obvious: (1) The great number of new workers called for by the defense effort, and the longer hours, will result in more total wage earnings even without any increase in wage rates; (2) there will be a few instances where some wages must be raised to facilitate the recruitment of workers for defense production; (3) there is the problem of insuring that some incentives exist, particularly to effectuate shifts toward defense production."

The basic attack on inflation must be through such fundamental measures as taxation, credit control, and increased production. Speculative forces acting upon wages and prices must also be prevented from blunting the effectiveness of the basic attack.

Purchasing power inevitably rises in a time of full employment. People work longer hours, more people go to work, and workers shift from lower paying to higher paying industries. At a time when our plants and our manpower are fully utilized for the production of civilian goods, defense production necessitates the diversion of materials and manpower from civilian to military production. When we substitute guns for butter, the inflationary problem is heightened.

We are forced to add to our total production by using what would in ordinary times be marginal mines, plants, and equipment. These facilities are costly. When national defense is at stake, cost cannot be a primary concern. But to secure their use, the general price level tends to be raised unless other methods, such as subsidies, are relied upon.

Needed increases of production also require that additional employees be brought into the labor market. Many workers must be induced by higher wages to leave their regular jobs and their regular homes to work in defense plants. The result is that the wage level is pushed up. The consequences can be serious. Utilization of high-cost facilities and securing of new manpower can seriously distort price relationships and wage relationships. These are facts and not theories. We have already seen how the establishment of great defense plants in essentially rural communities has resulted in the introduction of wages substantially above the area rate.

In this general setting-and urgent defense mobilization which unleashes inflationary forces-wage stabilization can make three distinct contributions to our mobilization program.

1. Wage stabilization operates to minimize competitive bidding for labor when labor markets are tight. Without wage stabilization in an inflationary period, one firm may bid labor away from another only to have the other firm raise wages to get the workers back. Each employer acting individually is forced to raise wages in a desperate attempt to solve his manpower problem, and the resulting wage spiraling aggravates both our manpower and our stabilization problem. 2. Wage stabilization seeks to maintain the normal wage and salary relationships among various groups of workers to the fullest possible extent. Uncontrolled inflation permits the strong and strategically placed employees to grab the lion's share at the expense of the white-collar workers, the unorganized, and even the weaker organized groups. Normal relationships in these particulars have already been disturbed. We must prevent its aggravation.

3. Wage stabilization buttresses price control. Prices can be pulled up by runaway demand, such as occurred shortly after Korea, when everyone frantically purchased goods in an effort to get set for expected shortages. Prices can also be pushed up by spiraling costs as resulted after Korea, when employers rapidly raised their wage scales in an effort to insure a future labor supply. Price control is difficult, if not impossible, without wage controls. Congress has already abundantly demonstrated its awareness of their close relationship.

It is important to recognize also that the wage system has more to do in our kind of a society than create purchasing power for wage earners. When people are paid according to the work and skill involved in their jobs there exists an incentive to production. That is also the basis for stable industrial relationships. But when differentials are upset, we can expect to find lower morale, lower production, and the inability to get the right workers at the right place at the right time. Since such considerations are of extreme importance, it is significant that in enacting the Defense Production Act, the Congress stated among the purposes of title IV

that of preventing

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* * * economic disturbances, labor disputes, interferences with the effective mobilization of national resources, and impairment of national unity and morale *"; and further, that there should be "full consideration and emphasis * * * [on] the maintenance and furtherance of sound working relations, including collective bargaining and the maintenance and furtherance of the American way of life * * [Moreover] * in stabilizing and adjusting wages, salaries, and other compensation [the President] shall make such adjustments as he deems necessary to prevent or correct hardships or inequities." The task of stabilizing wages must thus be undertaken with several major objectives in mind. Attainment of one objective only to lose others would not be effective wage stabilization. A balanced program is needed. It is essential to halt wage spiraling, to correct hardships or inequities, and to do so without seriously interfering with the effective mobilization of national resources. Many, many persons have told me in serious tones: "The job cannot be done." done even though the obstacles are formidable.

It has to be

May I briefly review some of the steps taken by the Board and by the Economic Stabilization Administrator in getting wage stabilization under way. In January 1951 drastic action was necessary to stop the runaway of prices and wages that began with the Korean hostilities. Wage increases were being widely made to match advances in the cost of living, in anticipation that the cost of living would move higher, and in efforts to prevent future manpower problems. As labor agreements expired, they were renewed with wage increases which became successively higher with later negotiations. Some agreements were not reopenable and continued with the old wage rates. Some companies and industries were depressed and their workers received no increases and even wage reductions. Others were prosperous and reopened firm contracts. Many increases were rushed through without waiting for contract reopening or other wage review periods in order to get under the wire before controls took effect. The freeze with its unavoidable inequities thus stopped an intense and chaotic movement of wages and salaries. The immediate task was to develop a policy which would permit the correction of these inequities—in other words to create orderly movements.

The strength of our country has been in the freedom of management and labor to work out their own problems. They have developed a wage structure which is diverse and complex but, nevertheless, has fairly well established interrelationships. It is not a simple undertaking to stabilize such a structure especially after strong and diverse movements had gotten under way only to be stopped in their tracks by the wage freeze.

There are approximately 45,000,000 nonagricultural wage and salary earners in this country. There is tremendous variation in the wage and salary practices for these 45,000,000 people, depending on the type of industry they are in, the type of work they do, and to some extent the area of the country in which they are located. A wage stabilization program meeting all the wage problems encountered cannot, of course, be developed overnight. It is a job which can only be done carefully, step by step, in relation to real problems. The Economic Stabilization Administrator, Mr. Johnston, expressed this thought on February 27, 1951, when, in approving the 10-percent formula as a first step in the creation of the wage stabilization policy, he wrote to Mr. Ching:

"It is obvious that wage problems are too numerous and too difficult to try to cover with the blanket of one formula, or two, or six. A step-by-step approach that recognizes these complexities is the better and fairer way to develop equitable and workable wage standards in balance with the whole objective of economic stabilization.'

These characteristics of wage stabilization were perhaps first obscured by the issuance of General Wage Regulation No. 1 which froze wages at the levels prevailing on January 25, 1951. Yet, it was made very clear at the time that these regulations were emergency measures designed to bring price and wage movements to a sharp halt and only to give the Economic Stabilization Administration time to develop detailed and equitable control regulations. The freeze was a technique and not a policy.

The President, in his April 26 message to Congress on the renewal of the Defense Production Act, called attention not only to the fundamental fact that the freeze regulations were by their nature only interim procedures but also to the delay in establishing wage stabilization policies. He pointed out that: "In the case of prices, the Office of Price Stabilization has been moving ahead with the adjustment process since the January freeze [but] in the case of wages, unfortunately, the process of changing over from the wage freeze to a fair, longer-run wage stabilization program was interrupted by the split-up

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of the Wage Stabilization Board in February. In the absence of a Board, only slow progress has been made toward establishing fair and workable wage stabilization policies."

The major step which the Wage Stabilization Board had taken prior to its split-up was the development of the so-called catch-up formula. This was the purpose of General Wage Regulation No. 6, which permitted adjustments in wages without prior approval note, without any prior approval at all-up to 10 percent over the January 25, 1950, levels.

Since the 10-percent make-up rule was a general policy determination it was subject to the approval of the Economic Stabilization Administrator, Mr. Johnston. In approving this policy determination, he called attention to the fact that this did not constitute a well-rounded police. He wrote:

"Regulation No. 6 provides opportunity for adjustments of wage and salary inequities arising through increases in the cost of living * * *. The regulation is a necessary step in evolving a fair wage policy as an essential part of a stabilization program to check the inflationary spiral. * * * The Board by this regulation did not intend, I know, to provide a single formula that would embrace all aspects of a complete wage policy and correct all inequalities in the country's wage structure."

The central them of regulation No. 6 was the equity of preserving the standard of living of workers as it existed on January 15, 1950. The Board expressly provided in regulation No. 6 that:

"The Wage Stabilization Board recognizes that there may be further changes in the cost of living. The present policy is adopted for the period until July 1, 1951. The policy set forth herein will be fully reviewed and reexamined before the end of this period."

This method of relating wages to changes in the cost of living is substantially similar to the approach which the War Labor Board followed in connection with the same problem during World War II. Then, wage increases up to 15 percent over the January 1941 wage level were permissible under the Little Steel formula. This was adopted as the method of preserving the real wage which existed at that time. It was held repeatedly by the War Labor Board that the cost of living was sufficiently stabilized during the war so that this basic policy as set forth in the Little Steel formula substantially achieveed its purpose.

When wage rates are related to the cost of living, the choice of a date for beginning that relationship is the crucial decision. When January 1941 was selected as the base date for the Little Steel formula, employees had to forego the preservation of the higher real hourly wage they had obtained in their free bargaining in 1941. Because there was global war and because of the allocation of about half of our resources for war needs, workers were asked to give up the higher real wage secured in their last free bargaining. At that time, we were concerned with the escalator clauses in a relatively few labor agreements. Such clauses characteristically relate cost-of-living changes to the wage rate as of the agreement date, i. e. they provide for the preservation of the real wage existing as of the contract date. In order to insure equitable application of the Little Steel formula, escalator clauses in private agreements were not permitted to operate beyond the limits of the formula.

Regulation No. 6, like the Little Steel formula, is one way of insuring that a certain standard of living of workers is preserved during an emergency period such as we now have. It is important to recognize, however, that there are some important differences between the wage stabilization problems faced in the early 1940's and those which now confront us. Contrary to the earlier experience, agreements covering an appreciable number of workers, nearly 3,000,000 employees, now contain some kind of cost-of-living escalator provision which generally link wages to cost-of-living changes following the agreement date. Employers and unions in their free collective bargaining have increasingly sought this means of insuring the maintenance of a real wage rate during the duration of their contract. These devices spread rapidly after Korea, since rapid advances in the cost of living were universally expected. At the same time, other managements and unions agreed upon fixed-term wage increases reflecting a mutual conclusion that cost of living would continue to rise. Still other managements and unions provided for future uncertainties by incorporating reopening clauses in their agreements.

While the Board's activities were suspended, the Economic Stabilization Administrator approved the operation until June 30, 1951, of the escalator provisions of agreements already in existence. He drew attention to this problem at the time he issued General Wage Regulation No. 8 in these terms: