The Guaranteed Wage Study
Toward the end of 1944, the War Labor Board (WLB) was involved in a dispute between the Carnegie-Illinois Steel Corporation and the United Steelworkers of America.108 The union was demanding that, during the life of the contract, the company offer a guaranteed wage to each employee.
The WLB did not agree to that, fearing that it would subject the industry to intolerable financial risk. However, as part of its ruling, it recommended that the president set up an independent body to undertake a comprehensive, national study of the issue of guaranteed wages, of which fifty to sixty schemes were believed to be in operation. The outcome was a comprehensive report by Murray Latimer, chairman of the Railroad Retirement Board, under the title Guaranteed Wages. The report's analysis of the economics of guaranteed wages was taken from a document prepared by Hansen and Samuelson, printed as an appendix to the Advisory Board's report, and it summarized one of its chapters.109 Hansen and Samuelson had first discussed writing this in February 1946, signing a contract three months later.110,t Their report was finished by December and published along with comments from John Maurice Clark, Edward Mason, and Sumner Slichter, as well as their response to the comments.Given that they met regularly (apart from the week when Paul and Marion's daughter, Jane, was born and his duties at home were “somewhat distracting,” though not arduous), there is little written record of their collaboration. An exception is a letter in which Samuelson, in addition to mentioning two articles and book on the subject, drew attention to a number of passages in J. M. Clark's Economics of Overhead Costs (1923),111 and sent him a copy of twenty short quotations that he had marked in his copy of the book.112 These show that Samuelson was thinking in terms of the behavior of costs over the business cycle.
Of particular importance was the fact that theret. It appears that Hansen was approached, he discussed it in person with Samuelson, and in this letter Samuelson is saying that he had decided it would be feasible. They received a single fee ($7,800, representing eleven months' full-time work—six months for Samuelson and five months for Hansen) that they could divide between themselves as they saw fit.
were overhead costs attached to labor; this included both the cost of training and the minimum level of consumption necessary to maintain the worker's health. These costs had to be borne by someone irrespective of whether the worker was employed, with the result that paying workers only for hours worked created a divergence between the cost of labor to the employer and the cost of labor to society. Moreover, cutting employment in a recession might not actually benefit business if the result was lower sales.
Their final report paid much attention to the business cycle. Guaranteed wages could, they argued, smooth out consumption spending, especially on durable goods, and hence ameliorate fluctuations in aggregate demand. An important advantage of such schemes was that, unlike other counter-cyclical measures, they were instant in their operation: as soon as demand faltered, guaranteed wage schemes would boost household incomes. However, they were not a substitute for other measures; their most useful role was smoothing out seasonal and other irregularities in employment, not as a cure for unemployment. They would do little about the main factor behind the cycle— fluctuations in business fixed investment. Moreover, even if they covered the entire labor force, they would not be sufficient to smooth out consumption. Guaranteed wage schemes had, therefore, to be used in conjunction with other policies.
Although they focused on the business cycle, Hansen and Samuelson did not neglect the effects on individual firms and workers. Clearly, guaranteed wage schemes were beneficial for workers, but only if they were not accompanied by significantly lower wage rates.
Guaranteed wages could also benefit companies, for greater job security could increase worker productivity; it was also possible that, if a guaranteed wage scheme were in operation, employers might respond to downturns by looking for way to improve productivity instead of by laying off workers. It was here that they had to get into technicalities about the way schemes were funded, because different types of scheme could have different effects on companies' incentives to invest and to innovate.Hansen and Samuelson concluded that guaranteed wage schemes should not be legislated, but should be achieved through collective bargaining between companies and unions. Agreements should contain limitations on employers' liability, so that in the event of a sharp decline in production, their financial viability would not be threatened. What government was encouraged to do was to revise tax provisions to encourage companies to adopt guaranteed income provisions, such as by favorable treatment of reserves they held and integrating guaranteed income schemes with Social Security. These recommendations were modest, no doubt reflecting both the conflicting arguments they had discussed in their report and their sense of what was politically feasible.
Clark agreed with the caution and realism of their conclusions. However, he criticized them for “here and there, by tone and implication,” conveying an impression that guaranteed wages might yield greater results “than are wholly consistent with the cautious character of the actual recommendations.”113 Throughout his comment, he questioned whether the report had paid sufficient attention to the way guaranteed wages and commitments to full employment would undermine the operation of the price mechanism. All three commentators were more cautious than were Hansen and Samuelson, concerned with the effects on investment and possible adverse effects on employment, and proposing ways in which employer liability could be reduced.
In short, they were less convinced that guaranteed wage measures would be effective.Latimer's report broadly endorsed the recommendations made by Hansen and Samuelson. It concluded that guaranteed wage schemes could be economically beneficial, provided they were properly designed. For this to happen, they had to be integrated with unemployment insurance, so that the cost to employers would be limited to the difference between someone's wage and his or her unemployment benefits, and funds to cover guaranteed wages needed to be regarded as an expense for tax purposes. Guaranteed wage schemes would also improve industrial relations by making workers more secure. Latimer's board accepted Hansen and Samuelson's judgment that such schemes could help smooth out seasonal and other small fluctuations in economic activity, and also their view that other stabilization policies would be needed. The report's summary concluded on a positive but cautious note.
The guarantee of wages is not a panacea but a tool, and a tool which becomes sharper, not duller, with wide and more intensive use.... And to suppose that any single tool—be it the guaranteed wage, or public works, or any other device—can become a multipurpose instrument by which all the ills of the economy can be remedied can lead only to confusion and failure. The guaranteed wage, used with care, with full recognition of its limitations, and with eyes open to dangers in exceeding those limitations, can become an integral part of a rounded program for greater security, for harmonious industrial relations, and for a more lasting prosperity.114
Though Hansen and Samuelson had done no more than write the document on which one chapter was based, they had clearly influenced the tone of the report, and the importance of their role was made clear in the transmittal letter to President Truman. They generated further publicity for their work with an article, “Making the Annual Wage Work,” in the New York Times Magazine.115 This presented the guaranteed wage as an idea introduced by enlightened business people, who believed that it would reduce labor turnover and increase labor productivity: it was a legitimate goal for labor, for households were not concerned about hourly wage rates, but about “takehome pay over the long pull” and guaranteed wages represented a better form of labor contract.
The current system did not make sense because, although a company could cut its costs by firing people, it was “an optical illusion to believe that society could slough off the wastes and losses resulting from unnecessary unemployment.”116 This was the prelude to a statement of the case for stabilization policy.The stabilization of employment at high and productive levels represents a challenge that we must face up to in the post-war period. But the guaranteed wage can function effectively only as a part of a broad program including fiscal and monetary measures to maintain full employment and adequate social security.
Samuelson’s consultancy work, both at the WPB and in the report on guaranteed wages, involved a continuation of his role at the NRPB in the early years of the war. In contrast, his forays into journalism marked a new departure and were to become an activity to which he devoted an increasing fraction of his time. Though he never ceased to be a mathematical economist, he clearly loved the very different challenges posed by policy analysis and the need to be familiar with economic institutions and economic statistics. Why else would he have begun to assist Goldsmith when his nine-and-a-half-hour days at the Radiation Laboratory and the pressure to finish Foundations would have provided ample reason for declining to take on an additional burden? He must have had a similar motivation to continue lecturing at the Fletcher School. As Goldsmith had perceived, Samuelson had become a general economist, as qualified to discuss the technicalities of the national accounts as to explain the mathematics of economic theory. He was no longer the narrow specialist in mathematical economics whom his teachers thought might find it difficult to get an academic position. Perhaps even more important, Samuelson had acquired a clear political position that he was to hold for much of his life.
In that he confessed to having supported Roosevelt, his claims to have been a conservative while at Chicago must be questioned, but there seems little reason to doubt his claim to have moved toward a much more liberal position. Anyone who read NRPB reports in 1942—43 would have picked up his links to Hansen, but as the war came to an end, his identification with Hansen had become public, epitomized by the support for Hansen's vision of the postwar era in The New Republic and his collaboration with Hansen on the guaranteed-wage report.
Up to this point, Samuelson had generally distanced himself from Keynes. However, in The New Republic articles he could hardly avoid taking a stance on the economist with whom liberal, interventionist policies were widely associated, and he defended him as a true friend of the free enterprise system. This changing position with regard to Keynes clearly owed much to Hansen, but it cannot be understood apart from his supervision of Lawrence Klein, his first PhD student.