Something for the economists to cheer about

Labor costs have decelerated in the United States this year, and economists are cheering. That's not because economists as a group have a nasty disposition. It's because they know the mathematics of the economy. Labor costs account for some two-thirds of national income, and, hence, for about two-thirds of the costs of producing the nation's goods and services.

"Clearly," writes Robert G. Dederick, assistant secretary for economic affairs at the Department of Commerce, in collaboration with economist James H. Klumpner, "we cannot expect sustainable relief from inflation without bringing down the rate at which wage costs are increasing."

Or, as Edward M. Bernstein, a Washington consulting economist, puts it: "The main reason for the persistent inflation is that the increase in labor compensation has been very large and has accelerated in recent years." Some conservatives use the predominance of wages in costs of production to attack organized labor. They accuse trade unions of being greedy and of being the chief cause of inflation.

But it isn't that simple. The current bout of inflation got its start because of the decision of President Johnson to expand the Vietnam war without paying for it through higher taxes in the late 1960s and the breakdown of the international monetary system in the early '70s. The nation's money supply was expanded excessively. Then the decision of OPEC to quadruple the price of oil in 1973-74 didn't help, either.

With the nation paying for the Vietnam war, less money was available for personal spending. In the 10 years to 1964, notes Dr. Bernstein, personal consumption expenditures averaged 63.4 percent of gross national product (GNP) -- the nation's total output of goods and services. In the next 10 years, to 1974, spending for personal consumption averaged a lower 61.9 percent, a shift economists consider significant. Government was spending more. Business investment was also greater.

Labor, which began to see its real wages eaten away by the inflation of the 1970s, began to demand higher pay settlements. By 1975 to 1980, personal spending had recovered to 63 percent of GNP. That's higher than in the late 1960s, when inflation picked up speed.

What all this means is that employees cannot expect to squeeze out a larger proportion of national income through higher salaries and wages. Something has to be left for the purchase of materials, plant and equipment, profits, and so on. Otherwise, the system won't work.

The problem for employees is that their real earnings have declined. (See chart. It looks at real compensation per worker-hour -- which is wages, salaries, and benefits in constant dollars divided by total workers' hours; and at real hourly earnings, that is, hourly pay in constant dollars.) On average, Americans have not been able to keep up with inflation despite large wage increases. Real spendable earnings of workers are lower than in 1973.

One reasion is that a larger part of labor compensation is in the form of nonwage benefits. People are paying more in federal and state income taxes and for social security benefits. Dr. Bernstein, in a lengthy paper for his clients , notes some difficulties with the statistics in calculating real earnings. That's because of shifts in the composition and occupations in the labor force.More people are working in service industries, for instance. So the situation may not be so bad as the raw data would indicate.

Whatever, he concludes that even with adjustments, real spendable earnings have probably fallen since 1972.The main reason is the lag in the improvement in productivity in the private business sector. From 1950 to 1968, productivity rose at a compound annual rate of 3 percent. Then over the following 12 years to 1980, output per hour of all people in the private business sector increased at an average annual rate of only 1.3 percent.

Dr. Bernstein notes: "Over an extended period, real compensation cannot increase more than productivity, particularly at present, when the share of labor compensation in the gross domestic business product is about as high as it has been at any time in the postwar period."

Another cause for the decline in real spendable earnings was the adverse change in US terms of trade -- that is, the index of export prices divided by the index of import prices. About three-fourths of the 27.8 percent deterioration in the terms of trade between 1973 and 1980 was due to the jump in the price of oil. The other element was the decline in the foreign-exchange value of the dollar in relation to the currencies of the other industrial countries.

"The attempt of labor to secure the customary increase in real spendable earnings under the adverse conditions of recent years was doomed to failure," Dr. Bernstein comments.

But there are signs now of improving productivity. And oil is not going up in price. Moreover, the dollar is strong. Eventually there could be room for real wage increases. Real compensation certainly cannot go up at the 10.1 percent rate of 1979, 1980, and the first half of this year without producing more inflation. The increase in productivity so far this year has meant a decelaration in labor costs, however, and that caused some cheering by the Commerce Department economists.

But next year the nation faces an especially heavy schedule of union contract negotiations. The resulting wage settlements, if moderate, could help trim the rate of inflation for several years to come.