A Dialogue On Steel

CONFUSA: The more I listen to the steel debate, the less I seem to understand. At his press conference last week, President Kennedy spoke of holding wage increases "within the confines of productivity gains." What does he mean by productivity?

HONESTUS: In this context, productivity means output per man-hour. If a given number of steelworkers produce 5% more steel this year than they did last year, with no change in the time spent on the job, it is said that their productivity has increased by 5%. Changes in productivity provide a way of gauging the efficiency of an economic unit--a company, an industry, or the entire national economy. For the U.S. economy as a whole over the past half-century, the productivity gain has averaged about 2.5% a year.

CONFUSA: What makes productivity go up? HONESTUS: The most important factor is new machinery and equipment. Other factors enter in, including higher levels of education and skill among workers, more efficient means of transportation and communication, research that pays off in new products or new techniques.

CONFUSA: What has productivity got to do with wages? HONESTUS: In recent years, productivity has come to be widely accepted as a yardstick for measuring the reasonableness of union demands for higher wages and fringe benefits.

Wage increases that are in line with increases in productivity do not exert either downward pressure on profits or upward pressure on prices.

CONFUSA: You lost me there.

HONESTUS: Well, let's take an imaginary steel company producing $100 million worth of steel a year. Say its labor costs--wages and fringe benefits together--add up to $40 million a year. Now, say productivity goes up 2.5% and the workers get a 2.5% increase--whether in wages or fringe benefits doesn't matter. The total output goes up to $102.5 million, or $2.5 million more than before. Labor costs increase by 2.5% of $40 million, or $1 million. That leaves an extra $1.5 million to be distributed between nonlabor costs and profits. So profits would increase along with wages.

CONFUSA: And the company would not have to raise its prices?

HONESTUS: No. The labor costs per ton of steel would remain the same as before. The wage increase would be what is called "noninflationary." CONFUSA: Why doesn't everybody accept productivity as a guide for wage increases and stop all the arguing? HONESTUS: That, in effect, is what the President and his Council of Economic Advisers are advocating. But in practice, the yardstick is not so easy to apply. You can't just take that average figure for national productivity growth over the past half-century and apply it to every situation--changes in productivity vary greatly from year to year, from industry to industry, from company to company within an industry. Furthermore, there is no intrinsic reason why labor should get a yearly wage increase equal to the productivity gain. If wage increases amounted to less than gains in productivity, that would reduce labor costs per unit of output, making possible lower prices or higher profit margins, or both. At present, with U.S. industries facing strong competition from foreign producers, and with the nation running a chronic deficit in its international balance of payments, lower prices might be in the public interest. Higher profit marginsX would enable companies to step up their equipment modernization for the competitive years ahead.

CONFUSA: How about the latest steel contract, signed a few weeks ago? Was that in line with productivity? HONESTUS: It added 10-c- an hour, or 2.5%--in line with the standard figure for yearly productivity gain. The settlement that Vice President Nixon helped to arrange in early 1960 after the long steel strike added about 40-c- an hour, but even that boost has been pretty well balanced by productivity gains.

CONFUSA: Then how could the steel companies justify price increases? HONESTUS: The industry's essential argument was that in the past few years steel profits have shrunk to the point where steel companies (after paying corporation taxes to the Federal Government and dividends to stockholders) did not have enough "retained earnings" left over to meet their needs for investment in modernization of plants and equipment. Total steel-industry profits, which ran to about $1.1 billion a year in the mid-igsos, declined to about $800 million a year over the past four years.

CONFUSA: Why have steel profits been going down if labor costs per ton of steel remained fairly stable? HONESTUS: The most important factor seems to be that over the past four years steel has been operating at about 65% of capacity, as against 90% in 1955-56. Unused capacity cuts profit margins because it adds to overhead costs and maintenance costs per ton of steel produced.

CONFUSA: Didn't the President say last week that corporation profits are running at record high levels? HONESTUS : Yes, he did, but he was not talking specifically about steel profits at that point. And it was misleading to say "the highest profits in the history of this country." Quantity of profits has to be measured against quantity of invested capital. By that standard, profits have a long way to go. Last year total profits in manufacturing industries came to 8.7% of invested capital, as against an average of better than 12% a year during the period 1947-57. The steel industry's return on invested capital last year was 6.1%.

And since the dollars invested in steel mills and equipment in past years were worth more than present-day dollars in terms of purchasing power, steel's real return on investment, adjusted for past inflation, was a lot less than 6.1%.

CONFUSA: Can steel's profits increase this year without higher prices?

HONESTUS: Steel profits will doubtless benefit from the general recovery of business. And some breaks from the U.S. Government are on the way. Pending in Congress is a bill to allow industry a 7% special tax credit on expenditures for new equipment, and that, if it passes, will help a little (see BUSINESS). In addition, the Treasury Department is preparing new depreciation schedules that will permit steel and other industries to write off the costs of equipment over a shorter span of years. That could help steel cover the costs of modernizing. But all these improvements together are probably not enough to meet the steel industry's overall needs for massive modernization.

CONFUSA: Well, Honestus, if you ask me, it sounds as if the steel industry needs some new ideas.

This file is automatically generated by a robot program, so reader's discretion is required.