(b) Employers or their representatives are tempted in the face of a strike, and too many succumb, to settle for a higher figure and then to argue before the stabilization agency that the agreement they have signed should be reduced. Such experiences are extremely deleterious to responsible collective bargaining in the future.

(c) No single number can be equally appropriate for all circumstances. Indeed, as has been noted, the very nature of inflation is that relative differentials have been distorted, and a single uniform number only perpetuates distortions and inequities rather than moving to correct them. There are high wage and low wage firms, industries and occupations; wage levels range from Alaska to the rural south and northeast. Some employees have had frequent increases in the past, while others have not had adjustments for a number of years. The Labor-Management Advisory Committee statement of February 26, 1973 expressed the view that "No single standard or wage settlement can be equally applicable at one time to all parties in an economy so large, decentralized and dynamic."

(d) There is no simple or uniform means of valuing complex fringe benefits such as pensions which is equally applicable to all firms with different age distributions, work experience and employee populations and which provides a basis to define permissible increases in these divergent circumstances. The PB.3 form and associated regulations developed by the Pay Board created a complex pricing mechanism for wage and salary and fringe benefits which is quite different from the common practice of collective bargaining and personnel policies; it sought to impose a single uniform concept and measurement across all industry. The Pay Board measurement device established a new and unacceptable, and largely misunderstood, set of standards for compensation changes. A competent stabilization program rather needs to define separable standards for many separate benefits, bearing in mind industry and locality practice as well as national experience.

6. One of the most complex problems for a wage stabilization program concerns the assessment of complex work rules, working conditions or other economic conditions of the working place outside of wages, salaries and benefits. The problems of appraisal arise either when changes are made more favorable to the worker (less favorable to the management) or when they are more favorable to the management (less favorable to the workers). An absolute and single ceiling on wages and benefits may encourage union negotiators to seek more leisure on the job or more favorable (and more costly) working conditions. Few stabilization programs have been able to deal with such questions. On the other hand, less stringent working rules for management, which lower costs, tend to create demands for higher wage and benefit levels. While these productivity changes are often difficult to measure and to evaluate, their most serious problem is that compensating wage and benefit increases may spread to other related employees who have not made the same productivity and cost-saving adjustments.

7. A wage stabilization program must be addressed not alone to organized employees, but should also apply to wages, salaries and benefits of employees not covered by collective bargaining as well as to executive compensation. A wage stabilization program should apply to public as well as to private employment. A wage stabilization program needs to be comprehensive not merely on general grounds of equity, but also because wages, salaries and benefits of different groups of employees are in fact interrelated and impact on each other.

8. The use of a fixed dollar low-wage standard, particularly when mandated by law, raises complex problems for a stabilization program. The issue is not whether certain low-wage job classifications should be permitted relative freedom to be increased, but whether a single number (such as $3.50) is equally applicable to all localities and regions of the country and to all industry groups. In some circumstances almost the whole wage structure is below a specified number while in others only a few occupations or employees are below the single figure. A relatively low wage for laborers in the construction industry in a rural state may be much higher than the bottom end of a distribution in the garment industry in New York; each may deserve attention under a stabilization program on grounds of being "below standard," and not exert any undue upward pressure on other wages, quite apart from any figure used uniformly across the country for all industries and localities. Both the parties and stabili

zation authorities need to consider the internal integrity of the particular wage structure through which a substandard criteria cuts and the consequences of any increases on grounds of substandard on other wages in the same or related establishments. All this cannot readily be compressed into a single uniform figure for all localities and industries.

9. Every wage stabilization program operative over a period of years becomes prey to experienced parties who find it possible to circumvent the regulations and achieve substantially larger increases than intended by the program. The greater the degree of self-administration in the program and the greater the resort to general regulations (as distinct from case-by-case processing), the more likely such gamesmanship. The automobile settlements of 1973 are illustrative where the pricing of cost-of-living escalator clauses, the exclusion of the higher costs of specified or fixed health and other benefits, and the carry-forward of qualified benefits from the previous ten years-all strictly in accordance with Pay Board regulations resulted in wage and benefit increases substantially in excess of 5.5 or 6.2 percent.

10. One of the fundamentals of wage stabilization concerns the conditions of the wage level and structure necessary to eliminate controls. If controls are eliminated with considerable distortions and inequities remaining in the wage structure, then the chances are high for further wage induced increases as groups seek to restore or to enhance their relative positions. If wage and benefit differentials are in relative balance, as they appear to be at the end of 1973, then the prospects for substantial increases to correct perceived inequities are much less. Further, if the general state of industrial relations is relatively peaceful, as appears to be the case in 1973, the prospects for wage distortions and further inflation is small, arising from prolonged and bitter strife.

However, substantial wage changes may arrive on decontrol from other factors influential in wage setting, such as increases in living costs, profits and the extent of tightness in labor markets. The development of these factors in 1973 poses a major problem for wage and benefit levels in 1974.

Dr. DUNLOP. Looking at this past year, our policies have been these. We have been interested in linking stabilization of wages to the collective bargaining process where it applies.

I do not believe, in other words, it is possible to stabilize wages without the active cooperation of labor and management in the areas where collective bargaining applies. Indeed, Mr. Chairman, one of the reasons for the recommendations, in my mind, that Mr. Shultz announced to you earlier, is that I do not believe it possible to achieve in 1974. the cooperation of labor and management on a wage stabilization program. You will see this view expressed by Mr. Meany in his testimony this morning on the other side of the Capitol. I do not believe it possible to continue controls without the kind of active help, the willingness to cooperate, that has followed the program during the course of the past year or so.

We also have been using, and I think they have been very important, tripartite committees in these mandatory areas of food, health, and construction. Without them, I can say to you beyond a shadow of a doubt that it would not have been possible to maintain an effective controls program in these areas.

One other point, Mr. Chairman, in support of the point of view you recommended or emphasized, about long-term programs, I would like to say to you that it was a cardinal principle of the Construction Industry Stabilization Committee from the time it was first established on March 29, 1971, to be interested in the longrun problems of the industry: The structure of bargaining, productivity and work rules, questions of separate rates for different branches of that industry, and the like.

Indeed, I would make it as a general proposition about wage stabili

zation that you cannot get the support of labor and management in a stabilization program on the wage side unless you are interested in the longer run problems that confront each side.

It is no accident that in the decontrol process, Mr. Chairman, we have been working at some of these long-term problems through a series of continuing meetings with, for example, the food and cement industries.

I have been trying to get those parties to think about their dispute machinery for the longer run. The press correctly reports in the last day or two that it was that kind of work that settled a very difficult meatcutters' potential dispute in Philadelphia over this past weekend with a 3-year agreement.

So I share your concern about the long run, and indeed wage stabilization cannot in my judgment be successfully done unless it deals with longer run points of view.

I need not take much time, Mr. Chairman, to finally on the wage side emphasize my very strong convictions that are set forth in this paper I separately introduced, that no single guideline or formula can be the basis for a wage stabilization program. In the words of our Labor-Management Advisory Committee, no single standard or wage settlement can be equally applicable at one time to all parties in an economy so largely decentralized and dynamic.

I also believe, Mr. Chairman, that a wage program should provide for executive compensation limitations consonant with wage stabilization, and at the unanimous request of our Labor-Management Advisory Committee and some Members of Congress, we last August closed most of the loopholes that were in the earlier regulations dealing with executive compensation.

In these last few minutes, I want to talk about the results of this program and what we were trying to do; recognizing that in the economic environment of 1973, the main impetus for inflation came from forces that direct controls are not well equipped to deal with.

Let me take a moment to carefully make a point this way. A simple comparison of wage and price movements before and during controls or during two different periods of controls does not constitute in my view an appropriate appraisal of the impact of controls.

The fact that consumer prices rose at the annual rate of 4.5 percent in the year before August 1971, and at the rate of 3.2 percent from August 1971 to December 1972. does not constitute an acceptable basis for judging the effectiveness of phase 1 and phase 2 controls in reducing the rate of inflation. The relevant question is, what prices would have done without controls.

Similarly, the fact that the CPI rese 8.8 percent from December 1972 to December 1973, compared to 3.4 percent in the preceding year does not constitute an acceptable measure of the effectiveness of phases 3 and 4. Only the most careful and sophisticated analysis could suggest whether the independent impact of controls was more or less effective in phases 3 and 4 than the earlier stages of the controls program. The question is, what would have happened without these controls?

It seems to me there are two areas regardless of what one thinks in which controls have made an appreciable contribution to stabiliza

tion. One area is our wage stabilization program in construction, partly because it did enjoy the cooperation of labor and management. It did take an industry where wage increases were averaging 17 percent a year in 1970 and reduced that rate, including fringes, to 5.4 percent this last year, 5.8 the year before.

Even more important to me, Mr. Chairman, was the effort to bring about some longrun changes in that industry, not enough, in my view, but still appreciable. More impressively the rate of strikes in that industry has been reduced from 1 in 3 contracts to 1 in 16 over this 4year period. It seems to me that one would have to say these facts provide fairly clear evidence of real contribution to stability.

I think also, Mr. Chairman, that the health care area is another in which controls have appreciably restrained and reduced the rate of inflation. The average annual increase in the medical care items in the Consumer Price Index ranges between 63 and 71 percent in the years 1967 to 1971. These same items averaged an annual rate of increase of 3.4 percent in the period November 1971 to January 1973.

The rate of increase in semiprivate room rates in hospitals, which was 19.8 percent in 1967 and in the range of 12 to 14 percent in the period 1967 to 1971, dropped to 5.4 percent under the controls program. The rate of increase in expenses per admission dropped from 14.4 percent in 1966 to 1969, to 11.6 percent in 1969 to 1971, 8.9 percent in 1972, and 7.4 percent in 1973. While these measures are not conclusive, they support the judgment based on knowledge of the health care sector that controls have probably constrained cost increases. I included that information in the statement earlier furnished to you. In contrast, as I have said in food, all we were able to do was to hold the margins of the retailers and hold the margins of the manufacturers while the farmers' prices went up and in some cases came down. As a consequence of the rise in agricultural prices, the share of the retail food dollar going to the farmer jumped from 40 to 46 percent in 1973, and the income of farm proprietors rose 32.7 percent compared to 11.9 percent for the total national income in 1973. Pretty clear what was happening there.

The effects on wages are shown, Mr. Chairman, in a table on page 22 of the testimony, which shows that from 1970 to 1973 in collective bargaining agreements we had a retardation in the rate of increase in wages, and in benefits and wages combined.

My own final conclusion, about the impact of controls, Mr. Chairman, in their economic effects, are set forth in this testimony at pages 31 and 32. Controls may have a small incremental effect to constrain inflation for a short period in the economic environment we have been in. They may more clearly have favorable impact on some particular sectors for a period, as they did, I think, in health and construction. But controls tend to run down as games are played with the regulations and as compliance declines.

Controls, Mr. Chairman, are a special purpose and limited tool to constrain inflation rather than a general purpose policy. Their potential for adverse effects on output and efficient production always needs to be carefully watched.

This problem becomes more serious the closer the economy is operating to capacity and the more significant are international interrela

tionships involving products important to the domestic economy. Controls also tend, I believe, to have an adverse effect on responsible collective bargaining for those reasons stated at pages 33 and 34 in the text of the statements Mr. Shultz referred to, by our Labor-Management Advisory Committee. You will see the actual language they use and it is for those reasons that I am strongly in favor of the recommendations that have been presented to you by Mr. Shultz.

There is set forth a lot of additional material here. Page 35 on down to page 54 constitutes an attempt on my part to summarize what I know about the controls business and I won't go into that.

I am prepared, Mr. Chairman, to support the recommendations and to answer with Mr. Shultz any questions you may have.

Sitting with me on my left is James W. McLane, who is Deputy Director of the Cost of Living Council, and next to him Andrew T. H. Munroe, our General Counsel.

Thank you for your courtesy, Mr. Chairman.

[Testimony resumes on page 316.]

[Dr. Dunlop's prepared statements submitted for the record on the administration's proposals for the future of economic controls, the continuation of mandatory health controls, and review of the economic stabilization program follow:]