1965. This recent figure is virtually identical with the division of income in 1955 and 1948. The inflationary wage-price spirals of the 1940's and 1950's did not, in fact, change the distribution of income.

Public policy is and should remain neutral with respect to wage and price decisions that attempt to change the distribution of industry's income between labor and capital. But when such decisions lead to inflationary pressure, they properly become a subject of public concern.

Exceptions

Some exceptions to the general guideposts are necessary to promote economic objectives. Wage increases above the general guideposts may be desirable where wage rates are inadequate for an industry to attract its share of the labor force necessary to meet the demands for its products; where wages are particularly low-that is, near the bottom of the economy's wage scales; or where changes in work rules create large gains in productivity and substantial human costs requiring special adjustment of compensation.

Because the industries in which unions possess strong market power are largely high-wage industries in which job opportunities are relatively very attractive, the first two of these exceptions are rarely applicable.

On the price side, increases in price above the general guidepost standard may occasionally be appropriate to reflect increases in unit material costs, to the extent that such increases are not offset by decreases in other costs and significantly impair gross profit margins on the relevant range of products, or to correct an inability to attract needed capital.

The large firms to which guideposts are primarily addressed typically have ready access to sources of capital; moreover, the profits of virtually every industry have risen sharply and are at record levels as a byproduct of the general prosperity in the economy. The second exception is thus not widely applicable in the present environment.

Short-Run and Trend

In the original discussion of the guideposts in the Council's Annual Report of 1962, it was pointed out that, "it is desirable to segregate the trend movements in productivity from those that reflect business-cycle forces." During the last 5 years, the economy has been closing a substantial gap between actual and potential production. This has augmented the yearly productivity gain beyond the long-term sustainable trend. Now that the economy has little gap remaining to close, the trend of productivity gains will be determined only by capital investment, an improving labor force, and technological progress. The temporarily high productivity gains that come from utilizing equipment and manpower more efficiently through higher operating rates are largely behind

us.

To assure future stability of unit labor costs, wages should increase no faster than the sustainable trend of productivity.

The original formulation of the guideposts did not specify any particular trend productivity figure, but rather listed various historical averages, covering different time spans and various segments of the economy. Since the economy was just recovering from the second of two recessions in a very short interval, it was difficult to identify the trend productivity rate from the immediately preceding experience. This difficulty was compounded by speculation that the trend rate might be accelerating as a result of faster technological change, particularly the spread of automation.

In the report of 1964, no single figure for trend productivity was specified, but in a related table the now well-known 3.2 percent appeared as the latest figure in a column labeled "Trend productivity." The figures in that column were described as the "annual average percentage change in output per man-hour during the latest 5 years." A 5-year period was chosen because, at that time, it was sufficiently long to include both the extraordinarily high productivity gains of a year of recovery (1962) and the extraordinarily low productivity gains of a year of recession (1960). Under the conditions of 1964, a 5-year average gave a good approximation of the trend productivity, because,

in effect, it averaged out the ups and downs of cyclical productivity swings. These same conditions prevailed in 1964, and the 3.2 percent figure appeared for that year in a similar table in the 1965 report. Subsequent revisions of GNP data would have made the 5-year average 3.4 percent in both 1964 and 1965.

Now that the economy is at the end of its fifth year of uninterrupted expansion, a 5-year average no longer gives a reasonable approximation of the true productivity trend. The last recession year drops out of the average, yet the unsustainable productivity gains of a year of recovery and 4 years of improving utilization are retained. If use of the 5-year average were continued this year and in coming years, the figure yielded by the 5year moving average would rise at this time to 3.6 percent and would undoubtedly fall substantially thereafter.

An analysis of recent productivity movements [makes it] clear that 3.6 percent would not be an accurate measure of the true trend of productivity. Rather, it appears that the long-term trend, independent of cyclical swings, is slightly over 3 per

cent.

For 1966, the Council specifically recommends that the general guidepost for wages of 3.2 percent a year be continued. We make this recommendation in the light of the following additional considerations:

With the economy approaching full employment and the crucial test of our ability to reconcile our employment and our cost-price goals at hand, it would be inappropriate to raise the guidepost.

The actual productivity gain that can be expected over the next few years is not likely to be above the trend value.

The 3.2-percent rate has been consistent with the approximate stability of industrial wholesale prices which has strengthened our competitive position in the world. Now is not the time to abandon that standard.

On January 1, employer payroll taxes to finance social security and Medicare rose substantially, raising labor costs per hour by an average of twothirds of a percent. These taxes are not included in the definition of employee compensation for purposes of the guideposts, since the rates and the benefits are determined by law rather than by collective bargaining. Nonetheless, recognition has

to be taken of the extraordinary increase in these taxes at this time, which will both raise unit labor costs and yield future benefits to employees.

Prices

The guideposts must continue to aim at complete stability of average domestic prices. While individual prices will rise from time to time, others must fall if upward pressure on the general price level is to be avoided. To achieve that goal in a fully employed economy will require that unions refrain from insistence on irresponsible wage settlements, and an even greater willingness by management to take the public interest fully into account in its pricing decisions. Every management with some market power must ask itself: Is a price increase justified by increases in costs? Or is it an attempt to take advantage of prosperity to widen profit margins? Those companies that incur rising costs for materials or purchased services must see if these cannot be absorbed from lowered costs elsewhere in their operations. And those companies with exceptionally favorable productivity gains must consider whether this is the time to seek to keep the gains in the form of still higher profits, or whether to share them with consumers through lower prices. Unions which are in a favorable bargaining situation must remember that wage increases that force employers to raise prices will be paid for by the workers in other industries.

Both unions and managements should reflect on the fact that if their actions create an inflationary spiral, the most likely outcome will be restrictive fiscal and monetary policies which will aim to stop further price increases but will in the process also reduce output, cut back profits, and reduce employment.

Costs and Prices in Construction

CONSTRUCTION is one of our largest industries. In 1965, it employed more than 4 million workers. Construction prices and wages have been rising more rapidly than in most other sectors of the economy. Between 1960 and 1965, price indexes of finished construction rose by 2.2 percent a year on the average. Over the same period, both aver

age hourly earnings and union wage rates of construction workers were rising at an annual rate of 3.8 percent. Larger fringe benefits probably bring the increase in total hourly compensation a fraction of a percentage point higher.

Higher prices have reflected both substantial increases in employment costs and some possible widening of profit margins. Wholesale prices of construction materials have been relatively stable during most of the expansion. While estimates of labor productivity in construction are highly imperfect, they nevertheless suggest that the annual increase in output per man-hour is below the economy-wide range, and substantially below the annual increase in employee compensation.

During the past year, the rise in construction prices has accelerated. The increase in the GNP deflator in 1965 was 2.9 percent for total construction, 2.7 percent for nonresidential construction, and 3.3 percent for private residential construction. The rise for residential building is particularly disturbing in view of the fact that there has been no increase of activity in this sector for several years.

The rate of wage increase in construction has also accelerated. Between October 1964 and October 1965, the average increase in union rates of construction workers was 4.1 percent; and average hourly earnings increased during the year by 4.5 percent. Moreover, many of the construction contracts signed last year provided relatively large deferred compensation increases in 1966 and 1967. Again this year, construction costs and prices are expected to rise more rapidly than the overall GNP deflator.

The inflationary cost and price situations in the industry reflect to some extent its prosperity, especially in its industrial and commercial sectors. They also suggest the existence of more permanent structural problems which should be of vital concern for both the industry and the community at large. There have been many important technological changes in various sectors of the industry, but the total technical progress is clearly insufficient.

Ways must also be found to expand more quickly the supply of skilled construction labor. Restrictions on entry not only retard the growth of the industry but also have adverse social effects, since they tend to keep Negro youths out of attractive types of employment. To meet the needs of rapid

growth and equality, vocational programs for skilled craftsmen must be stepped up.

There is need for institutional arrangements that will increase the geographical mobility of skilled workers. Labor mobility in construction has been reduced by the spread of locally instituted welfare and pension plans whose benefits are not "portable" from one area to another. Development of national pension and health and welfare programs as well as broader vesting and interarea portability of rights and benefits will contribute to greater mobility and more efficient utilization of the present supply of construction workers.

Homebuilding

The fundamental demographic factors influencing residential construction will not change significantly in 1966: the increase in the number of households is expected to be about the same as the 1960-65 average. Financing conditions may be less favorable, since conventional mortgage rates began to rise last September for the first time in 5 years and some further increases appear possible. On the other hand, the excess supplies of new housing in selected areas seem to be dwindling. On balance, the value of residential construction is likely to change little in 1966.

Labor Cost Trends

Labor costs per unit of output are an important determinant of overall cost and price changes. In the postwar period, their widely varying movements have frequently been associated with similar changes in the price level.

Labor costs per unit of output reflect both hourly compensation and output per man-hour or productivity. Increases in compensation raise unit labor costs; increases in productivity lower it. Whether labor costs per unit of output rise during the particular period depends on the relative balance between increase of compensation and of productivity.

In construction, the 1965 contracts-as in previous years generally resulted in higher wage advances than elsewhere. Between October 1964 and October 1965, union wage scales increased, on the average, by 4.1 percent. Construction is clearly an industry that raises serious problems for wageprice stability.

Cooperation Provisions in Major Agreements

A FORMAL COMMITMENT to cooperate in raising the quantity and quality of production, or improving sales, has traditionally had little appeal to American labor and industry. Except for certain well-publicized efforts (particularly during World War II), most unions and employers, either by tacit understanding or the will of one party, have limited their formal relationships to collective bargaining and to the processing of grievances. Informal relationships, particularly among supervisors and union stewards at the work level, have, however, always been common.

The present study, one in the Bureau of Labor Statistics new series of agreement provision studies, found a continued reluctance on the part of management and unions to enter formal cooperation agreements.1

Only 1 out of 4 major labor agreements (450 of 1,773 contracts) contained provisions for unionmanagement cooperation on production problems, technological change, sales promotion, legislation, and similar managerial problems (table 1). These involved 1.9 million of 7.5 million workers covered by contracts in the study, also about 1 out of 4. Half of the provisions were accounted for by five industry groups, each having more than 30 agreements with specific cooperation clauses: Transportation equipment (55), food (42), construction (42), transportation (33), and electric and gas utilities (33).

Pledges

In the overwhelming number of cases, no formal machinery was established to implement those clauses. Rather, the cooperation clause, in 377 provisions, was confined to a pledge on the part of the union to support particular policies, notably in the area of production and efficiency and less frequently in matters dealing with promotion of company products or in technical innovations. Such a pledge, whatever its standing in terms of enforceability, nevertheless indicates a positive commitment by the union. Among its purposes is the education of workers and union stewards to the value of cooperation.

Occasionally, the union's pledge included an acknowledgment that the gains won by its members in collective bargaining were paid for by improved productivity or sales. Since cooperation dealt with areas in which the employer could act on his own if he preferred to, only the union's pledge to cooperate was called for. Sometimes, however, the union's pledge was coupled with one from management, usually to cooperate on labor-management matters or to guarantee that workers would not be hurt by their participation in joint efforts.

Ninety-two agreements (about a fourth of the number pledging cooperation) established joint committees or funds. Half were accounted for by two industries. In food and kindred products, there were 18 joint committees, a number of which were Armour-type funded study committees; 2 in construction agreements there were 28 industry promotion or "advancement” funds. As a general rule, the extent of union participation in these promotion funds was limited. Outside the construction industry, however, the joint committee represented a firmer commitment to cooperate than the more casual pledge, since the committee provided a mechanism to discuss problems in particular areas and to implement agreed-upon solutions.

To some degree, this relative scarcity of formalized cooperative arrangements reflects long-standing union and management attitudes as to their respective functions. As a matter of policy, management may avoid such collaboration because it is considered (or may lead to) an encroachment on managerial prerogatives. Many employers prefer to limit joint negotiations only to those issues on which they are legally required to bargain. Similarly, unions may not wish to become too closely identified with company policies.

1 This article is based on Major Collective Bargaining Agreements: Management Rights and Union-Management Cooperation (BLS Bulletin 1425-5) which will be published shortly. For this analysis of union-management cooperation provisions, the Bureau examined 1,773 major collective bargaining agreements, each covering 1,000 workers or more, or virtually all agreements of this size in the United States, exclusive of those in railroad and airline industries, and in government. These agreements applied to approximately 7.5 million workers or almost half the total coverage of collective bargaining agreements outside of the excluded industries. Of these, 4.1 million workers covered by 1,023 contracts were in manufacturing. and the remaining 750 agreements applied to approximately 3.3 million workers in nonmanufacturing. Virtually all agreements were in effect in 1963-64.

2 For a discussion of the Armour Fund, see Monthly Labor Review, November 1965, pp. 1297-1301.

On the other hand, a desire to avoid formal commitments rather than a desire to avoid cooperation may explain the low prevalence and the limited nature of union-management cooperation provisions. There are certain advantages to informal ad hoc cooperation, including the ability to dissolve it if its ends are achieved or failure is inevitable, without publicity and without jeopardizing future cooperation. An agreement provision, in contrast, is fixed for the term of the agreement and may be difficult to change thereafter.

A study of contract provisions cannot, of course, measure the extent and nature of joint efforts not specified in the agreement. Most common undertakings, particularly those directed at short-term ad hoc goals, ordinarily do not come to public attention. The most typical form of cooperation takes place at the plant level in face-to-face meetings between company and union officials as they resolve issues that arise in the daily operation of

the plant. Such cooperation contributes to tacit understandings which supplement formal policies in every bargaining relationship.

The present study discusses collectively bargained cooperation pledges and committees dealing with issues in which management normally reserves the right to act unilaterally, a point underscored in numerous "management prerogative" clauses, namely, production and allied activities, including technological change, company welfare and sales promotion, and legislative policies. Not accounted for in this study are committees established to resolve particular issues or administer programs arising out of the agreement, such as incentives, job evaluation, safety, health and insurance, grievances, etc. Nor were bargaining committees established to spread contract

3 Four arrangements of this type are described in BLS Bulletin 1425-5. (See footnote 1.)

See Monthly Labor Review, February 1966, pp. 170-175.