LONG-TERM CONTRACTS

The Price of Peace Comes High

AS negotiators hammered out new labor contracts in half a dozen big U.S. industries last week, long-term labor contracts that hand out automatic annual pay boosts came under increasing fire. In this recession year, more than 4,000,000 U.S. industrial workers will pocket automatic increases averaging 8-c- an hour under contracts signed during the boom years of 1955-56-57; some 4,300,000 U.S. workers will also take home cost-of-living raises averaging 3-c- to 4-c- an hour--while industry's earnings are expected to decrease by about $2.5 billion. Businessmen who championed long contracts as a prerequisite of labor peace now wonder if the game is worth the candle. As one top Government labor expert says: "People are becoming disillusioned. Three to five years is a long time in a period of economic change."

Businessmen are well aware that long-term contracts have many advantages. Management need not fear a production-crippling strike for three, four, even five years. Long-term contracts spare labor and management alike the heavy expense of time and treasure that yearly bargaining sessions require. With a fixed wage pattern, companies can plan ahead years in advance, knowing what their labor bill will be; they are able to guarantee delivery without interruptions. Were it not for long-term contracts in the auto industry, for example, countless auto suppliers would live from hand to mouth, not knowing from one day to the next if they could continue operating. The longer contracts thus make for stability.

The other side of the coin is that long-term contracts often cost more than they are worth. Insiders say that General Electric thinks it paid too dearly for the five-year contract that it happily signed with the International Union of Electrical Workers in 1955's boom year, now wants no more long-term pacts. Union Carbide also signed its first long-term contracts in 1955--for three years--and once was enough. Labor costs have jumped most in precisely the areas where profits declined most. Last April, Union Carbide's contracts compelled it to hike wages 14-c- an hour in plants where 40% to 50% of the workers were laid off. In the future, Carbide will aim for one-year wage pacts. As for cost-of-living escalator clauses, says Union Carbide Industrial Relations Vice President Carl Hageman, "we'll take a strike anywhere rather than agree to that."

Many big companies still like long-term contracts. General Motors' position: the longer the better for all concerned. Yet even G.M., which started the trend to lengthy contracts by signing the first important five-year pact with the United Auto Workers in 1950, has been burned. In the first half of 1958, when earnings dropped by $147,700,000, its labor bill went up per worker, because of a cost-of-living rise. G.M., U.S. Steel and the other giants can afford such bumps as the price of labor peace. Many a smaller company cannot. Says a spokesman for another automaker: "The ups and downs of the business cycle have a less basic effect on G.M. than on us. We feel better with a contract negotiated every year or two years."

Shorter contracts also are preferred by firms in fastmoving industries where technological changes come with dazzling rapidity. A rigid, long-term contract only tends to damage their competitive position. Electronics firms and oil producers must have flexible labor relations if they hope to take advantage of technological breakthroughs. In aviation, Lockheed and other planemakers prefer short-term contracts, not only because the state of the art is proceeding in quantum jumps, but also because the business itself comes in fits and starts.

Another major effect of long-term contracts is to nudge the price spiral higher. Long-term contracts boosted the steel industry's labor bill by 26-c- an hour last month; steel prices advanced soon after by $4.50 per ton at a time when many experts argued strongly for price cuts to stimulate the nation's economic recovery. Money-losing railroads were obliged to hike hourly wages by 12-c- last November, pile on 4-c- more in April, now are slated for a third 7-c- jump this November. Meanwhile, they fall deeper into the red, though both passenger and freight rates are going up.

No one wants to scrap long-term contracts altogether. More and more companies now aim at the compromise middle ground of a two-year contract. What U.S. industry also needs is a contract that will give it some of the same protection that U.S. labor gets. Just as labor's wages are often pegged to the cost-of-living escalator, so might they be tied to earnings, with the automatic wage boosts being granted in fat years and withheld in times of temporary recession. In a dynamic economy, the escalators should run in both directions.

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