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Issue #1452      28 April 2010

The Wage Increase-Price Increase Myth

The so-called “green shoots” of economic recovery” are measured by the growth in profits and exports, not wage rates. But for workers, many of whose wages shrank during the economic crisis, the recovery is still to come. Prices have continued to rise and next month’s federal budget is set to cut spending in key areas that affect the living standards of workers and their families. Workers’ wages have a great deal of catching up to do, but trade union demands for even very modest wage rises are constantly met with employer and government claims that they will cause inflation and bring the recovery to its knees.

Such outbursts by bosses and the governments that serve their interests are not new. The following article, a chapter from Penal Colony to Penal Powers by J Hutson, was written for the Amalgamated Metal Workers and Shipwrights’ Union (now the Australian Manufacturing Workers’ Union) and first published in 1966. The “Fair Pay Commission” has taken over from the Arbitration Commission in its role of determining the minimum (basic) wage. The old imperial pounds, shillings and pence have been replaced by dollars. Just multiply the profits by a thousand and not much else has changed. The chapter is titled: “The Wage Increase-Price Increase Myth”.

A "Clean Start" rally in Sydney in 2006 demanding a better wage deal for cleaners.

The employers have been successful in planting in the minds of many people the myth that wage increases cause price increases, so nobody is better off and could even be worse off by obtaining wage increases. Yet such a proposition is a fallacy that was exploded by the British economist Ricardo as far back as 1817. In the post-war [2nd World War] period of galloping inflation in Australia it did appear as though it were true, particularly in connection with the basic wage, for every time this was increased prices did go up.

There is no doubt that it was the strong hold that this idea had on the minds of the workers which enabled the employers to obtain the abolition of the quarterly adjustments of the federal basic wage in 1953 without any struggle, or even much protest, from those concerned. The idea still had a strong hold in 1965, but the trade union movement has not done sufficient to clarify the issue among its members.

Even the militant section was confused at the time and was therefore passive, but it has now mainly come to see through the deception. They appreciate that although something effective should be done to impose control over increases in prices it would take a long combined political and industrial campaign to achieve it in the face of the strong opposition of the employers, who consider that only wages should be subject to price control.

But the matter of price control, important as it is, should not divert the workers from pressing for increases in wages by assuming that until something is done about price control nothing should be done about wages, for the general trend is for prices to rise continually. This is because increases are a result of either the law of supply and demand or the deliberate policies of the big monopolies which have no scruples in raising prices at every opportunity.

Wages chase prices

The correct concept therefore, is that wage increases usually chase price increases and not the reverse, and that they are the best means of obtaining immediate relief from increases.

Economists admit that it is very difficult to show any relation between wage and price increases. For one thing, the price of Australian exports are determined more by world prices than by the level of local wages. And although wage increases can on occasions cause some increase in the internal price level, prices can rise even if the Commission grants no increases in the basic wage and margins. For example, in the 12 years between 1934 and 1946 the basic wage was increased by £2* [two pound] to compensate for price increases, yet the only award increase of any kind was the 5/- [five shillings] average prosperity loading granted in 1937, which clearly indicates that other factors must have been operating to increase prices.

In 1956 the Victorian government abolished the quarterly adjustment of the state basic wage, yet after only one year in which there were no award wage increases the “C” Series Index Number for Melbourne [CPI] had risen by the equivalent of 19/-.

The movement of the Consumer Price Index from March 1960 to June 1961 also tells a revealing story, for although it rose sharply by nearly 4% no award wage increase was granted in that period. In contrast, from September 1961 to June 1963 it rose by only 0.4%, or 1/-, yet during that period the basic wage was increased by 12/-, margins** were increased by 10%, and over-award payments were substantially increased.

The reason for this came out in the 1962 Annual Leave Case when the employers’ advocate said that it should not be granted because the employers had been unable to pass on the 12/- increase in the basic wage granted in 1961 because of the credit squeeze and intensification of competition. In other words, because economic circumstances made it impossible for the employers to pass on the increase in wages in higher prices they were compelled to absorb it partly out of their profits and partly out of increased productivity.

This trend continued into 1965 for some goods despite the £1 increase in the basic wage in 1964. From June 1964 to June 1965 the Consumer Price Index rose by 5.1 points, but 2.2 points or nearly half of this was because of an increase in the prices of meat and potatoes in which wage increases had no effect at all.

The Arbitration Commission has no illusions about where the responsibility lies for increasing prices, witness the comment in the 1961 Basic Wage Judgement that, “ ... material was put before us which indicated that in 1960 in certain consumer goods industries prices fell in spite of wage increases. But Dr Coombs’ [Chairman of the Reserve Bank] comments support our conclusion that in spite of the employers’ submissions to the contrary costs need not rise automatically with wage increases ...”

In the 1963 Basic Wage Judgement this was reaffirmed when it was said that, “We agree with what was said both in the 1963 Margins decision and the 1961 Basic Wage decision that increases in prices are determined by those who fix prices.”

Monopoly price fixing

The comment referred to was made by Dr H C Coombs in 1959 when he said, “Consider the pricing policies of industrialists and trades. No doubt some degree of competition prevails over a wide range of industry and commerce but there are degrees of monopoly and tacitly accepted practices which mean that prices are determined by management rather than by the market for a wide range of goods and that within significant margins producers can decide at what prices their goods shall be sold.” [Monopoly price fixing and price fixing collusion is even worse today than it was then.]

This was substantiated by the statement of Sir Garfield Barwick in 1963, when he was Attorney General, that there were between 500 to 600 trade associations in Australia which had been formed to implement restrictive practices designed to maintain price levels.

In 1965, a Royal Commission set up by the Tasmanian government found that two-thirds of the trade associations in that state engaged in restrictive practices. The result is that the law of supply and demand has become inoperative in some areas and so is of little benefit to the consumer of many goods.

The resistance of the monopolies to reducing prices has now reached the stage that even in times of recession when the market becomes flooded they prefer to cut production rather than to cut prices. Some have even been known to increase prices during a recession in order to maintain their rate of profit on the reduced production. So any attempt to control prices could only be fully effective if a strong restraint was put on the power of such associations to manipulate prices in the interests of the big monopolies.

The monopolies have whenever possible applied the theory of the English economist, Lord Keynes, who said in 1936 that, “A movement by employers to revise money-wage bargains downward will be more strongly resisted than a gradual and automatic lowering of wages as a result of increasing prices.”

The success of the application of this policy is shown by the big reduction in the value of the pound that has taken place, for taking it as being as £1 value in 1945 its value in 1964 had been reduced to 4/-.

The success in reducing the value of increases granted in awards is shown by the following table, which was an exhibit in the 1959 Basic Wage Case.

The anomaly as far as trade unionists are concerned is that they require the approval of the Arbitration Commission after a long publicly argued case to increase the price of their labour power, but employers do not have to do this before increasing the price of their commodities.

Boosting profits

A good example of this was the increase in the price of steel imposed in early 1964 by the Broken Hill Proprietary Ltd and John Lysaght Ltd. Yet in the year ending May 1964, Lysaghts had a disclosed profit of £3,415,000, while BHP had a disclosed profit of £18,170,000 after allowing £28,738,513 for depreciation, while between 1955 and 1964 the wages and salaries per ton of steel had actually fallen slightly by 1/- to £13/5/-. But BHP made no secret of the fact that the increase in price was to finance its expansion programs, a matter having no connection whatsoever with wage increases.

In addition, the employers have developed a number of ingenious devices for obtaining a hidden profit by reducing the actual value of what is bought.

Obsolescence is deliberately built into the product; inflated advertising costs are included in the price structure; deceptive packaging gives an inaccurate impression of the actual contents and conceals price increases; poor construction results in high maintenance costs; trade-in policies produce an artificial price level and so on. Prices also have a habit of increasing a bit more than is usually warranted by any actual increase granted in award rates, as the opportunity is not missed of taking an extra nibble.

It is clear that without some form of firm price and profit control the general trend will be for prices to increase. To impose such control would require some very positive action by the Australian people. Until that is done they can only try to improve their economic position by struggling for increases in wages. If they do not because of a belief in the myth that wage increases must cause price increases, they will only fall that further behind.

Next article – Gil Scott-Heron: don’t play apartheid Israel!

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