Wage-Productivity-Price Issue

by John Kendrick



This article clarifies the relationship between productivity, wages, and prices and shows why productivity, at best, is only a rough guide to permissible wage increases. As early as 1948, General Motors concluded a labor contract with the United Auto Workers which provided for an automatic annual hike in wage rates based on the presumed average rate of increase in national productivity. The productivity factor has entered increasingly into discussions at the bargaining table, and at least indirectly into many labor contracts involving automatic, deferred wage increases. There is, nevertheless, considerable confusion concerning the relationship of productivity to wages and prices and the applicability of a "productivity formula" to wage determinations. It should not be forgotten, however, that the more dramatic price rises of the past two decades have been due to excessive increases in money demand, relative to productive capacity, which were sanctioned, if not caused, by actions of the monetary and fiscal authorities. For the purposes of this article, it must be assumed that monetary and fiscal policy is appropriate for attaining the objectives of the Employment Act of 1946.

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