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Bulletin N o. 9 0 7




n it e d




epar tm en t
u r e a u





abo r

a b o r



t a t is t ic s


Washington, D. C., June 9,1947

h e


e c r etar y



a b o r


I have the honor to transmit herewith an economic analysis of guaranteed wages,
which was prepared by Professors Alvin H. Hansen and Paul A. Samuelson, who were
commissioned by the Bureau of Labor Statistics to make this analysis as part of its
collaboration with the Guaranteed Wage Study of the Advisory Board of the Office of
War Mobilization and Reconversion.
E w a n C l a g u e , Commissioner.
Hon. L. B. S C H W E L L E N B A C H ,
Secretary oj Labor.

Bulletin N o. 9 0 7
A reprint of Appendix F from Guaranteed Wages: Report to the President
by the Advisory Board, Murray W . Latimer, Research Director

Upon the initiative of the Advisory Committee of the Office of War Mobilization
and Reconversion in the study of guaranteed wage plans, the Bureau of Labor Statistics
commissioned Professors Alvin H. Hansen and Paul A. Samuelson, of Harvard Uni­
versity, to prepare an economic analysis of guaranteed wages. This report was designed
to supplement the description of guaranteed wage plans (Appendix C of the OW M R
report and also reprinted separately as a Bureau bulletin), prepared by the Bureau for
the Office of War Mobilization and Reconversion, and the exploration of the practical
possibilities and problems in the extension of guaranteed wages, prepared by the Guar­
anteed Wage Study staff of the Office of War Mobilization and Reconversion. It
appears in the Final Report of the Advisory Board of the Office of War M obilization
and Reconversion as Appendix F.
The present report is an economic analysis of the potential effects of guaranteed
wage plans on the economy and the relation of guaranteed wages, if widely adopted, to
economic security, business cycles, and the pattern of resource uses.
In accordance with arrangements described above, the Bureau of Labor Statistics
also commissioned Professors J. M . Clark, of Columbia University, and Edward S.
Mason and Sumner H. Slichter, of Harvard University, to comment on the analysis by
Professors Hansen and Samuelson. These comments are included in the report.
The views expressed in all cases are those of the authors.


A ppendix F.— E conomic A nalysis of G uaranteed W ages

I. Introduction______________________________________________________________________
Brief history of guaranteed wage proposals_______________________________________
Origin of present study__________________________________________________________
Description of guaranteed wage plans------------------------------------------------------------------Some preliminary observations----------------------------------------------------------------------------Proposed outline of analysis--------------------------------------------------------------------------------II. Analysis of the econom ic burden of idleness------------------------------------- --------------------Social versus private costs of idleness------------------------------------------- ----------- ----------The econom ic costs of idleness------------------------------ ------------------------------- --------------The cost of instability to the worker_____________________________________________
The cost of instability to industry------------------- ----------- ---------------------------------------III. The guaranteed wage in a broad security program-----------------------------------------------Different patterns o f job security________________________________________________
Guaranteed wages and stabilized employm ent....................................... ......................__
A limited guaranteed wage----------------------------------------------------------------------------------Three roads to job and income security__________________________________________
IV . Guaranteed wages, over-all effective demand, and the business cycle______________
Introduction and brief summary-------------------------------------------------------------------------Jobs and markets________________________________________________________________
W ill guaranteed wages stabilize consumption?------------------------------------------------------Business cycle stabilization and production efficiencies resulting from guaranteed
Tw o methods of finance--------------------------------------------------------------------------------------Pay-as-you-go finance-----------------------------------------------------------------------------------------Reserve financing________________________________________________________________
V. Guaranteed wages and efficient use of resources----------------------------------------------------The merit-rating controversy____________________________________________________
Business cycle versus other idleness---------------------------------------------------------------------Conditions of chronic unemployment-------------------------------------------------------------------Optimal pricing under high employm ent conditions_______________________________
Dovetailing and large m onopolies________________________________________________
Pooling labor reserves through a well organized market___________________________
Stabilization and differential pricing--------------------------------------------------------------------V I. Policy recommendations----------------------------- ------------ - ............- ------------------------------


Addendum : Depression policy and the guaranteed wage......... ........... .................................
The fear of depression-------------------------------------------------Econom ic aspects of Government aid------------------------------------------------------------------Governmental grant-in-aid based on profitlevelsof firm s__________________________
Governmental financial aid based on level ofgrossnational product_______________
A more precise formula for each proposal-------------------------------------------------------- ----Various aspects of the Government aid program__________________________________
Subaddendum: Comments on the Hansen-Samuelson report--------------------------------------Comments by J. M . Clark_______________________________________________________
Comments by Edward S. M ason--------------------------------------------------------Comments by Sumner H. Slichter.......... ......................
Final comments by Alvin H. Hansen and Paul A. Samuelson......................................




W orld W ar I I brought fu ll employment to the
American people. The com ing o f peace holds
forth the promise o f a high level o f job oppor­
tunities and production demand fo r some time
to come. But no one can today forget how in
the dozen years before Pearl Harbor the Am eri­
can economy was plagued with widespread un­
employment and idle machine capacity—with an
attendant loss o f money income to all classes o f
society, and a reduction in human living stand­
ards so calamitous as to threaten the foundations
o f our democratic way o f life. It is now abun­
dantly clear that involuntary idleness cost the
American people the equivalent o f some $300,000,000,000 o f real income in the decade prior to the
war. The tragedy, suffering, and frustration o f
the depressed 1930’s w ill not, and need not, be per­
mitted to recur.
It is not too much to say, therefore, that sta­
bility at high levels o f employment and produc­
tion w ill continue to be the number one domestic
economic goal o f all the community—business,
labor, agriculture, and the Government.
Paradoxically, the United States, one o f the
youngest and most vigorous o f all advanced na­
tional economies, seems throughout much o f its
recorded history to have experienced among the
highest rates o f unemployment o f all the nations
o f the world. In the great depression follow ing
1929 our percentage o f unemployment exceeded
that o f all other nations, not even being surpassed
by the German Weimar Republic. In the recov­
ery years just preceding W orld W ar I I we barely
regained the 1929 level o f real output, having
wasted in unemployment a decade o f potential
improvements in our standard o f living.
Even before W orld W ar I, the percentage range
o f unemployment in this country seems to have run
about double that o f a country like Britain. In
addition to having greater amplitude o f cyclical
fluctuations (and somewhat more frequent business
cycles), the American economy has also been char­

acterized by far greater seasonal swings. Besides,
there is some evidence that the range of cyclical
variation has been getting worse rather than bet­
ter in the course o f recent decades.
No single line o f attack can be relied upon in
the battle against depression. In addition to a
fu ll employment program, with its many-sided and
continuing policies, the Government must be pre­
pared with its social security and welfare measures
to ameliorate the human burdens o f unemploy­
ment. Nor can business, agriculture and labor
stand by, passively relegating to the public au­
thorities all responsibility and action designed to
promote over-all stability in jobs and production.
One device aimed at m itigating the instability
o f production and pay rolls is the policy of guar­
anteed wages. It is the purpose o f this report to
give an economic analysis o f proposals which have
been put forward under this general heading.
The programs initiated by private enterprise
to moderate irregularities in production and em­
ployment actually antedate by well over a quarter
o f a century the explicit acceptance by Govern­
ment (in the Employment A ct o f 1946) o f its re­
sponsibility to combat depressions. Particularly
after the sharp 1921 post-W orld W ar I recession
in pay rolls and production, various forward-look­
ing corporations began to institute voluntary wage
guarantee plans o f one sort or another. Others,
without explicitly guaranteeing wages or employ­
ment, made strong efforts to smooth out the pattern
o f their operations so as to provide more con­
tinuous annual employment.
Some o f these plans may have involved overambitious altruism. Others may have represented
ill-conceived paternalism, covertly directed against
the organization o f unions and the development
o f collective bargaining. In any case, most of these


schemes were short-lived, many foundering on the
rock o f the great post-1929 depression. Does this
mean that they were failures? Not necessarily.
In an era when governmental unemployment in­
surance had not yet been enacted, these plans often
aimed at softening the burden o f unemployment
for at least a limited time. They served as a first
wall o f defense against depression; the fact that
these bulwarks were breached does not mean that
they were not o f considerable value. Also, in all
fairness it should be said that the enactment of
govem m entally-provided unemployment compen­
sation reduced the pressing need for the continua­
tion o f some o f the plans.
W hile the great depression o f the early 1930’s
spelled the end o f many o f the earlier guaranteed
wage plans, it at the same time emphasized in
the minds o f everyone the great need for job se­
curity. And during the recovery years o f the last
decade, an increasing number o f additional com­
panies initiated new guaranteed wage plans.
Organized labor—in part stimulated by the late
Franklin D. Roosevelt—begin to develop an in­
terest in wage guarantees during the years just
prior to W orld W ar II. A t the present time, many
guaranteed wage programs are embodied in man­
agement-labor collective bargaining contracts.
Many unions in industries not covered by such
contracts have indicated an intention to explore
the possibilities o f this device.

2. Analysis o f methods and possibilities o f reg­
ularizing production and stabilizing employment.
3. Inquiry on cost o f various types o f wage
4. Analysis o f economic effect o f guaranteed
5. Examination o f relation o f guaranteed wage
plans to other economic measures also intended to
stabilize or increase the national income.
In connection prim arily with the last two o f
these points the authors o f this report have been
asked to make a general theoretical analysis o f the
economics o f guaranteed wages and its relations to
other policies. In doing so, we have not consid­
ered it fruitful to attempt a review o f the volum­
inous literature on the subject, nor to present a
well-rounded factual and quantitative picture o f
the status and prospects o f guaranteed wages.
This we can best leave to others. Early in our in­
vestigations it became clear that the greatest serv­
ice we might hope to render lay in bringing
under analysis and focusing attention on certain
relatively neglected—but crucial—aspects o f the
Perhaps most important o f these is the need for
a critical examination o f the repercussions o f guar­
anteed wages upon the level o f aggregate demand
and upon the business cycle. H ardly less impor­
tant is an examination o f the economic principles
and patterns o f pricing which society needs to
keep in view in order to achieve the most efficient
use o f our human and capital resources, the reduc­
tion o f wastes o f unstable production, and the
In 1944, at the peak o f the war effort, several
equitable distribution o f the burdens o f unavoid­
labor unions presented a request for a wage guar­
able idleness. These two m otifs—business cycle
antee to the W ar Labor Board. The W ar Labor
and aggregate demand aspects o f guaranteed
Board ruled against the establishment at that time
wages, and efficient, equitable use o f our national
o f so important a new precedent in American labor
resources—run through all our analysis, not only
relations. On the occasion o f their refusal to grant
in their relationships to each other, but also
the United Steelworkers’ request, the board mem­
against the background o f other public and private
bers indicated their interest in the proposal, and
economic policies.
recommended that the whole problem be given
W e have not considered it our primary respon­
careful study. Early in 1945, President Roosevelt
sibility to spell out in any detail a specific program
requested that the Advisory Board o f the Office
o f action. W e have been prim arily concerned with
o f W ar Mobilization and Reconversion make a
general economic analysis. In chapter V I we do
study o f guaranteed wage plans as a means o f reg­
put forward certain recommendations, which we
ularizing production and stabilizing employment.
represent policies which are economically
In making its investigation into the whole prob­
the light o f our analysis. Needless to say,
lem o f guaranteed wages, the OW M R proposed:
Examination o f specific experience with guar­ these recommendations—and indeed all o f our
judgments and findings—are put forward only as
anteed wage plans.


our own opinions as individual citizens and econo­
mists. They do not necessarily represent the opin­
ions o f the Advisory Board o f the Office o f W ar
Mobilization and Reconversion, or the Washing­
ton Research Staff under the direction o f Murray
W . Latimer. In part our recommendations over­
lap or are similar to those in Mr. Latimer’s final
report.1 It is a pleasure to acknowledge here the
stimulus o f discussion with him and his staff, even
though we were not always able to agree fully
upon final formulation o f principle and emphasis.
Here at the beginning it is well to ask exactly
what is meant by “ guaranteed wages.” No simple
answer can be given because o f the extreme variety
o f plans that one company or another has intro­
duced under this general heading in the last quar­
ter o f a century. A t the one extreme, we observe
what is little more than a pious declaration o f the
company’s intention to make efforts to stabilize its
production so as to provide steady jobs and in­
comes. A t the other extreme, a company may have
signed a legal collective bargaining contract with
a union agreeing to guarantee 45 or even 52 weeks
o f work per year to almost all o f its employees.
Even the three best-known plans associated in
the public’s mind with the guaranteed wage—those
o f the Hormel, the Nunn-Bush, and the Procter
& Gamble companies— differ materially in form
and substance. Because there are so many descrip­
tions o f the various guaranteed wage plans avail­
able, we do not propose to discuss here (except very
briefly) the different features involved in such
plans, preferring to refer the reader interested in
details and in particular concerns’ plans to the
voluminous literature on the subject.2
By a guaranteed wage plan, we shall not neces­
sarily mean an annual wage plan. Conceivably,
1 Guaranteed W ages, Report to the Advisory Board, Office o f
W a r Mobilization and Reconversion, January 31, 1947. See pp.
1 -4 1 1 of this volume.
* The most comprehensive study prepared to date is the Latimer
report. The National Industrial Conference Board, the National
Association of Manufacturers, and Brookings Institution either
have issued or will shortly issue studies on various aspects o f
wage guarantees; and Joseph Snider’s book, The Guarantee of
W ork and W ages (Andover, 1 9 4 7 ), is ju st out. See also the bib**
liography prepared by the TJ. S. Department of Labor, April 1945,
entitled “ The Guaranteed Annual W age and Other Proposals for
Steadying the Worker’ s Incom e; Selected References,” and the
popular book by J. Chernick and G. Hellickson, Guaranteed An­
nual W ages (University o f Minnesota Press, 1 9 4 5 ).

the employer’s commitment to maintain workers’
incomes might be fo r longer durations than a
year—fo r example, over the whole o f the business
cycle. More often guaranteed wage plans are
set up with a calendar year as the fundamental
unit o f time. But not infrequently, a firm may
wish to guarantee employment fo r only 6 months
or only for the whole o f a season. Our analysis
w ill apply also to such plans, but we exclude from
our consideration programs concerned with insur­
ing only a fu ll week’s work or any period less
than, say, a quarter o f a year.
The form o f the guarantee may vary consider
ably: Some firms may insure a certain number o f
weeks’ employment at unspecified job assignments
and wages; or more often, there may be a guar­
antee o f a certain number o f specified pay checks—
even if the concern should find that it has no duties
for the workers to perform . Usually, if a firm
has bound itself to continue a worker’s income, it
w ill cast about fo r some work fo r him to do, even
i f it is o f a low -productivity character or o f a
currently unprofitable and unremunerative sort.
But where even this is lacking, the corporation
agrees to maintain the incomes o f the workers
who are included under the guarantee. The guar­
anteed wage becomes in this case the precise equiv­
alent o f 100-percent unemployment compensation,
maintained for the duration o f the guarantee.
Often the plan provides fo r the maintenance o f
income payments from week to week at a steadier
rate than hours o f employment, the overtime o f
some periods being balanced against the hours o f
underemployment through other weeks o f the
year.3 Under the Fair Labor Standards A ct, any
weekly hours o f work in excess o f 40 are usually
to be paid fo r at a one-and-a-half overtime rate;
but that act did provide fo r a partial relaxation
o f such penalty overtime rates in cases where a
collective bargaining contract is in force guaran­
teeing certain minimum hours o f total yearly
Not infrequently, guaranteed wage plans are
associated with various wage-incentive or profitsharing programs. In addition to the steadily
maintained periodic wage payments, there may
8 Some companies w ill lend their workers money in periods of
underemployment, payable in subsequent periods o f brisk em­
ployment. Such wage-advance schemes are related to, but dis­
tinct from , the guaranteed-wage plans discussed in this report.


also be supplementary bonus or wage payments
at longer intervals o f time. The total remunera­
tion o f the workers may be geared to their pro­
ductivity, to corporate profitability, or to the
value o f production and sales.
So much for the form o f the plan, whether it
(a) guarantees employment, or (&) guarantees
wage income, or (o) involves profit-sharing and
various “ flexible-wage” features. Equally im­
portant are the other various features and lim ita­
tions o f the guarantee, such as the follow ing:
(1) Lim itation o f coverage. W hat workers
are covered ? Are only those who have been em­
ployed 2 years, 1 year, or 6 months covered? Or
are only workers o f certain skills and departments
(2) Lim itation o f weeks per year. A re a full
years’ work and income (2,080 hours per year,
52 weeks at 40 hours per week) guaranteed? Or
are only, say, 45 weeks o f work guaranteed?
(3) Lim itation on duration o f guarantee.
W hat is the duration and legal character o f the
guarantee? One prominent plan guarantees 48
weeks per year o f work to all o f its employees o f
more than 2 years’ standing, but the guarantee
is a unilateral one which the company reserves
the right to discontinue at any time it may wish
to do so. Other guarantees may run from the
first o f the year to the last, and may be embodied
in a collective bargaining contract with a union.
Still others may be binding upon the company,
but terminable after it has given a year’s or 6
months’ notice.
The possible costliness, benefits, and other quan­
titative economic effects o f guaranteed wages all
depend very much upon the type o f guarantees
which are adopted—upon their degree o f cover­
age, the hours guaranteed, and the duration o f the
guarantee. T o avoid a tedious catalog o f the
various plans that are conceivable or now in force
we shall find it convenient to outline a few possible
guaranteed wage plans, in terms o f which our
exposition may be facilitated. This does not im ply
any approval o f the particular details embodied
in these examples. They are set out simply as
hypothetical cases:
E x a m p l e 1: F or each calendar or fiscal year,
the company agrees—in a legally or morally
binding fashion—to provide some number o f
weeks, say 45, o f full-tim e pay (or its equivalent


spread over the year) to a specified group o f
workers, selected by seniority or length o f previ­
ous service. The contract or agreement may, or
may not, be renewed fo r the follow ing year and
its coverage and hours o f guarantee may be altered,
provided notice to that effect is given at least 3
months prior to the end o f the contract year.
In this case, if the corporation encountered a
sudden slump very early in the year it might be
obliged to incur the costs o f maintaining income
for a period o f almost a year. On the other hand,
if the decline in its sales came late in the year,
the company might be able to reduce its pay roll
in very short order.
It would run the risk o f having to maintain,
on the average, substantial wage payments for
something like 6 months after a decline in its
E x a m p l e 2 : This is the same as example 1 ex­
cept that the contract or agreement does not run
from the beginning o f one fiscal year to the begin­
ning o f the next. Instead, the guarantee runs on
indefinitely—until the company gives 12 months’
notice o f its intention to discontinue the guarantee
or change the extent o f its coverage.
One could imagine a plan identical to example 2
except that the period o f termination notice is
reduced to, say 6 months.
E x a m p l e 3: This could be like either o f the
above two plans, but with the extra limitation that
the employer’s wage liability to workers laid off
should never exceed in any year, say, 10 percent
o f the guaranteed pay roll. In most years, this
would, in fact, provide 100-percent income security
to all workers. But in a very bad year, when the
number o f idle workers became very high, then the
employer’s liability would have an upper lim it.
In this event, the laid-off workers would have to
share in some manner the amount available for
wage payments within the lim itation o f the 10
percent liability.
Obviously all sorts o f variations could be at­
tached to each o f these illustrative cases. A ll three
examples have this much in common: They en­
hance the job and income security o f workers for at
least a limited time into the future; and they in­
volve the employer in the risk that, fo r a limited
time at least, he may be obliged to maintain his
wage outpayments even if his sales revenue falls

off sharply. However, the employer has not ob­
ligated himself to incur unlimited losses fo r an
unlimited period; after the period specified under
the terms o f the contract, his guarantee terminates;
and, o f course, after these same periods o f time,
the worker may find him self jobless and without
a current pay check.
One point requires notice and emphasis at this
place. W hile the letter o f the guarantee may
specify that the employer’s liability ends after the
date o f termination, management and unions both
are well aware that there w ill be considerable
social pressure upon the employer to renew his
guarantee and to maintain employment longer
than specified in the contract. This explains why
many financially strong companies, who do not
doubt their own ability to finance guaranteed
wages for the first year o f a serious depression, are
nevertheless reluctant to offer even a limited guar­
antee. Not without cause, they fear that such a
lim ited commitment may put them on the spot
after the period o f guarantee is over. They realize
that even those companies which guarantee noth­
ing are under more or less powerful internal and
external pressure to minimize lay-offs; but they
also realize that such pressures are not brought to
as sharp a focus as would be the case under a guar­
anteed wage plan. In the follow ing discussion
we shall, on occasion, have to go beyond the legalis­
tic letter o f the guarantee commitment to the fur­
ther economic implications.
Before discussing in detail the outline o f our
economic analysis in the follow ing chapters, we
shall do well to clear the air with a brief state­
ment o f certain fundamental preliminary conclu­
First, the guaranteed wage is not a cure-all for
the problem o f business cycle unemployment—
nor could it ever approach near to being one.
Exaggerated claims, overstating its importance
and advantages, do more harm than good. A t the
very beginning, we wish to state for the record—
frankly and explicitly—that if it ever had to come
to a choice between guaranteed wages and other
important depression and anticyclical public and
private policies, such as our system o f unemploy­

ment insurance,4 our social security programs, or
fiscal and monetary policy, then it would be guar­
anteed wages that would have to be rejected. W e
do not wish to be misunderstood. As w ill become
abundantly clear from the pages that follow , we
do not see any necessary conflict between guaran­
teed wages and other needed Government policies.
On the contrary, it is to be hoped that guaranteed
wages can be integrated with unemployment in­
surance so as to strengthen income security. Also,
it is our view that guaranteed wages can be
financed so as to contribute something toward
moderating the excesses o f boom and slump in the
business cycle.
Second, although the primary motivation fo r
guaranteed wages comes from wage-earners’ fear
o f business cycle unemployment, our studies lead
us to the follow ing somewhat paradoxical conclu­
sion. In a world o f high effective demand and pur­
chasing power, where there is no problem o f
chronic or depression unemployment—in such a
world, guaranteed wages m ight make its greatest
contribution: by stabilizing seasonal and other
short rhythms in production and by equitably
allocating the economic burden o f the residual
amount o f unavoidable idleness and unemploy­
ment. This conclusion emphasizes all the more
the importance o f a fu ll employment program,
within the pattern o f which the guaranteed wage
can play a significant role. Under the present sys­
tem o f lay-off on short notice, the employer finds
himself with insufficient financial incentive to un­
dertake the costly efforts which are necessary fo r
thoroughgoing stabilization. W hat are truly
overhead costs to society often appear to the em­
ployer as avoidable variable costs, with the result
that enlightened competition does not lead to the
economically most efficient use o f resources.
The view that the single individual firm, even a
large one, can by good intentions and clever poli­
cies substantially contribute to solve the problem
o f the business cycle, we are compelled by economic
analysis and all the available empirical data to
4 There are, to be sure, many technical imperfections in our
present unemployment insurance sy ste m : inadequacies of inte­
gration and uniformity between states, insufficient benefits in
relationship to reserve accumulations, perverse cyclical aspects
of merit or experience rating, etc. These should be remedied by
legislation and practice. They should not be used as an excuse
to attack unemployment insurance, or as an argument for sub­
stituting guaranteed wages or any other alternatives in place
of unemployment insurance.


discard in the beginning. No one enterprise is
secure enough or powerful enough to withstand
and m odify the great swings o f general business
In our judgment, there is scarcely more validity
in the hope that gradually, by more and more
firms voluntarily extending the scope o f their
stabilization activities, we shall approach finally
to a condition o f continuing high employment in­
come and production. As we shall show later,
there is every good reason for looking with ap­
proval upon a redoubling o f the efforts o f manage­
ment, on its own initiative, toward ironing out
its employment and production fluctuations.
And when a considerable number o f firms have
carried through bold, imaginative, and well-con­
ceived stabilization programs, considerable prog­
ress w ill have been made toward reducing the
costs o f economic idleness. But by far the great­
est progress that w ill have been made is likely to
be in connection with unemployment arising from
seasonal and other rhythms o f business activity
o f shorter duration than that o f the business cycle.
From a dispassionate appraisal o f the efficacy
o f guaranteed wages, the device would appear to
be, by itself alone, a weak reed upon which to
rely in an attack on such widespread unemploy­
ment as our economy has encountered in recent
years. Indeed, it would be nothing less than
tragic if, by management initiative or govern­
mental and trade-union pressure, an ambitious
program o f guaranteed wages was undertaken
without at the same time instituting other more
important programs o f government and business
designed to promote high and stable levels o f pro­
duction, income and employment.
W hile it is conceivable that an ambitious pro­
gram o f universal wage guarantees would
diminish the intensity o f minor fluctuations, such
as occurred in 1924 and 1927, there is danger that
it might be financed in a manner that would in­
tensify such deep and cumulative recessions as
that o f 1929. The relationship between guar­
anteed wages and the sharp recessions o f the
1920-21 or 1937-38 type are by no means easy to
appraise. I f other governmental measures were
not instituted to cope with depressions, sober
quantitative appraisal o f the relationship o f pay
rolls to corporate net worth shows that insolvency
and bankruptcy could well be the price o f any


guaranteed wage program which was not care­
fu lly limited in its coverage and duration. Busi­
ness, even large business, is not the master o f its
fate where the business cycle is concerned.
On the other hand, we cannot be content to ac­
cept the chaotic status quo. F or if we look at,
say, the automobile industry, which very prop­
erly stands out in the public’s mind as typifying
the very essence o f our industrial society, the
picture we see is far from reassuring. Auto­
mobile production is an efficient undertaking, pay­
ing higher wages than the rest o f the w orld and
yet through greater productivity able to undersell
all other countries on a free-trade basis. It is
and has been a relatively profitable industry. An
important part o f its total output is under the
control o f three giant corporations, each o f which
has presented typical chapters in American in­
dustrial life : the self-contained growth o f Henry
Ford’s great enterprise, the evolution after W orld
W ar I o f the vast General Motors Corporation,
and the post-1929 emergence to fu ll stature o f the
Chrysler organization. In addition the recent
war has placed the remaining smaller independent
producers in a comparatively favorable financial
But if we look more closely we see that it is an
industry that lives dangerously. Stocks o f fin­
ished cars and o f parts and raw materials are
literally measured in terms o f days and weeks o f
production rather than in terms o f months and
years. The continuance o f production hinges on
a precarious scheduling o f thousands o f compo­
nents produced in hundreds o f separate plants.
This elaborate division o f labor and interdepen­
dence, which we hardly notice in ordinary times,
makes for efficiency but at the cost o f vulner­
ability—as was revealed in the postwar disorgani­
zation o f the industry.
Despite the fact that the use o f automobile ser­
vices, as measured by passenger rides or gasoline
consumption, fluctuates only moderately over the
year and even over the ups-and-downs o f the
business cycle, the flow o f automobile production
proceeds in much more fitful jerks and starts, as
dictated by the vagaries o f consumer and dealer
ordering and the march o f the business cycle. In
consequence, the employment record o f the in­
dustry—the job experience o f the workers attached
to the industry—can almost be termed a shocking

one. Even in relatively good times workers often
spend considerable time waiting to be called back
to their jobs. In depression the production o f
autos and trucks may decline to a quarter o f the
prosperity levels.
T o say that the situation is a shocking one is not
to imply that any one group o f individuals or or­
ganization is to blame or that the record o f this
industry is worse than that o f many others. D iff­
erent companies have at various times made de­
termined efforts to iron out their fluctuations in
production. The whole industry together has
attempted to reduce seasonal variations by means
o f rescheduling the time o f introducing new
models and o f holding auto shows. The results
have been disappointingly meager. Clearly the
historically developed institutional structure o f
the industry and o f our unstable American econ­
omy must be blamed fo r the unsatisfactory charac­
ter o f the industry’s performance with respect to
production stability. Under the existing set-up
no one company has the financial incentive or abil­
ity to provide steady jobs and income.
F or a cure to the fluctuations in auto production
over the business cycle, we must properly look else­
where. But it is not too much to hope for, and to
ask o f management and labor, that measures be
taken and practices be altered to moderate the
incidence o f irregular and seasonal employment
and o f economic idleness. This may require many
far-sweeping changes in the organization o f the
industry: increases in inventories and storage
facilities, limitation on undue coddling o f con­
sumers’ desires with respect to modification o f style
and model changes, perhaps acceptance o f lower
hourly wage rates in exchange fo r higher annual
Conceivably, such a program o f
thorough-going seasonal stabilization might even
raise costs and prices to the consumer. None o f
these measures would be easy and none would be
costless. But in a real over-all sense the costs
are less than those o f idleness under the present
regime o f instability, where the burden falls upon
those least able to bear it, the workers.
Is it too much to hope that in the not too distant
future all parts o f the industry w ill look back and
wonder that the present day wastes o f idleness
were even for an instant tolerated? W e believe
not. But in taking this viewpoint, we do not mean


to imply that such a happy state o f affairs w ill
come into existence sim ply by forcing the indus­
try, through Government legislation or collective
bargaining pressure, speedily to guarantee wages
for substantially all employees. Unless a general,
many-sided attack is made upon the problem o f
business cycle stabilization, together with a stepby-step industry-wide attack upon seasonal in­
stability o f production, guaranteed wage plans are
likely to be so costly as to be doomed to failure.
It is this dilemma—that the present day deeplyrooted wastes o f instability are economically
intolerable but cannot simply be legislated out o f
-existence—with which this report is concerned.
O f the five divisions o f the study o f guaranteed
wages mentioned earlier, our report is naturally
concerned with the final tw o: an analysis o f the
economic effects o f guaranteed wages, and an ex­
amination o f such plans in relation to other eco­
nomic measures designed to stabilize or increase
the national income. Such an analysis is a neces­
sary supplement to a study o f specific experience
in different concerns and different industries.
The whole is more than the sum o f its parts.
Particular firms may have success with the guar­
anteed wage, in part because they are the only ones
offering workers its advantages. The total eco­
nomic impact o f such plans might be negligible, or
if overly ambitious or too “ soundly” financed, the
device might even prove harmful to over-all sta­
bility. I f wage guarantees discourage investment
commitments and if firms are induced to stabilize
their employment at low levels in order to min­
imize lay-offs, the problem o f reaching and main­
taining fu ll employment could conceivably be
aggravated. Or if guaranteed wages had the effect
o f attaching workers to a single firm in subsidized
idleness or inefficient production, then under cer­
tain circumstances national output and produc­
tivity might suffer.
Under the present wage contract, do the appar­
ent money costs o f hiring or laying off labor truly
reflect the overhead social costs to society o f main­
taining the workers’ standard o f living? What
should the relationship be between prices and
wages in order that economic resources may be
used most efficiently?


Perhaps more important still is the question
o f how guaranteed wages—on a limited or on a
wide scale—affect the over-all level o f aggregate
demand. W ould the mere act o f guaranteeing
employment create attitudes and behavior patterns
sufficient to realize its stated objectives? W e all
know in a rough way that jobs make markets, and
that markets for goods make jobs. W ould the
widespread commitment to maintain jobs auto­
matically create the purchasing power necessary
to make good such a commitment? Or to put the
matter in another way, would the balance o f ag­
gregate demand in relation to our productive po­
tential be im proved; and would the basic factors
causing fluctuations in investment—factors which
underlie the business cycle—be compensated for?
Each one o f these questions requires detailed
over-all economic analysis. Each one leads in­
evitably to a consideration o f other economic poli­
cies aimed at promoting economic security and
stabilizing business activity.
In the chapter immediately follow ing this in­
troduction, we undertake to analyze the true eco­
nomic cost o f different kinds o f idleness: to
inquire how its amount is to be measured, to inves­
tigate how its burden is distributed between wages
and property-returns, both in and outside o f the
industry concerned, and to examine the adequacy
o f incentives toward regularization.
Then in chapter IH the interrelationships, com­
parisons, and contrasts between guaranteed wage
programs and other public programs such as un­
employment insurance and fu ll employment pro­
grams are discussed.
Chapter IV presents an economic analysis o f

the effect o f guaranteed wages on the level o f and
fluctuations in aggregate demand. The results are
found to differ depending upon whether the guar­
anteed wage program impinges on a society which
is highly cyclical and fluctuating, or is reasonably
stable at either a low underemployment or a high
fu ll employment level. In this analysis the ef­
fects o f private reserve financing in contrast with
the “ pay-as-you-go” method o f financing are
W hile the problem o f unemployment was quan­
titatively most pressing before the war, it cannot
be permitted to overshadow the ever-present task
o f seeing to it that resources shall not only be used,
but used efficiently so as to contribute toward the
maximum satisfaction o f individual and social
economic wants and needs. Chapter V is con­
cerned with the effects o f guaranteeing wages upon
the pattern o f resource use and upon the structure
o f prices, wages, and costs. Here again it is neces­
sary to distinguish among the different kinds o f
economic societies into which the guaranteed wage
plans are introduced.
In chapter V I, we make a number o f policy rec­
ommendations growing out o f our analysis. Such
guaranteed wage plans as may be introduced
should be set up only after the possible dangers
and limitations have been thoroughly canvassed.
When this has been done, we believe that, under
safeguarded procedures, the guaranteed wage can
be made to contribute to a better and more effi­
ciently functioning economic order, and that in­
ducements such as those recommended in chapter
V I looking toward more widespread experimenta­
tion and expansion are justifiable.

In this chapter we shall undertake to analyze in
some detail the precise nature o f the economic costs
o f unemployment and idleness. In the course o f
our discussion it w ill become clear that the prob­
lem o f irregular production is more than the prob­
lem o f general cyclical unemployment, although
the quantitative magnitude o f the latter has been
such in recent years as to dominate our thinking
and attitudes. T o the degree that we are able to
avoid serious breakdowns in the years ahead,
problems (“ labor m obility” fo r example) which
seemed—and were—unimportant against the
background o f depression unemployment, w ill


take on a new significance. Thus we are concerned
not only with depression unemployment, but with
the problem as a whole, including daily, weekly,
yearly, and longer-term irregularities and fluctua­
tions in business activity, many o f them avoidable.
But first let us note that the present system o f
hiring, employing, and paying labor is only one o f
many conceivable alternatives; and one which be­
came widespread even in our own economy only
in the last century. Before industrialization had

impersonalized our economic relations, it was
probably the rule more often than not for a crafts­
man’s helper to be hired by the year or season.
Often, barring discharge fo r personal incompe­
tence, the worker could even count upon some
measure o f job security and income maintenance
even through hard times, the employer and em­
ployee tightening their belts together.
Even today in agriculture and some branches o f
small industry, the same relationship often pre­
vails. And throughout all industry, large and
small, executives and white collar workers are in
good part assured o f employment over all o f the
year and through most o f the business cycle. It
is perhaps not too hard to imagine an economic
system in which the wage contract with all em­
ployees was more nearly like that with executives
and white collar workers than like the present
prevailing mode o f wage payment and tenure.
Let us, however, consider the prevailing form
o f the wage contract and analyze its economic e f­
fects for whatever they may be. An industry with
high seasonality may hire its workers for 7 or 8
months, leaving them idle during the off-season.
Similarly, a concern sensitive to cyclical fluctua­
tions may take on many new workers during the
upswing o f the boom, and conserve its resources
during the depression by curtailing its wage
Still, as was pointed out so clearly a score o f
years ago by P rof. J. M. Clark in his masterly
Studies in the Economics o f Overhead C ost:6
In a more general sense, however, there is a minimum
o f maintenance o f the laborer’s health and working capac­
ity which must be borne by someone, whether the laborer
works or n ot: that is, if it is not borne, if the maintenance
is not forthcom ing, the community suffers a loss through
the deterioration o f its working power which is at least
equivalent to the cost o f maintaining the laborer. Thus
the burden is there in any case: it cannot be avoided.
From this point o f view it appears that a large part o f
the cost originally counted as wages represents an over­
head cost which the laborer is responsible for covering
as best he can, just as the employer is responsible for
covering the overhead costs on account o f capital. How­
ever, if the laborer fails to cover it the community does
not escape the burden, and it is ultimately borne by in­
dustry in the shape o f reduced productive power and
damaged morale. And thus it comes back to the employer
in any case.
8 John Maurice Clark, Studies in the Economics o f Overhead
Costs (University of Chicago Press, Chicago, 1 9 2 3 ).

* * * The reason why the expenses o f production,
some o f them, normally vary in proportion to output is
simply because the terms o f the wage contract are drawn
in that way. The employer leaves the wage earner to care
for his own overhead and the terms o f the contract are
not scientificaUy adjusted as, for instance, the contract
fo r electric current is sometimes adjusted to the over­
head costs o f the ultimate producer. It may be that we
shall find that our general system o f wage payment is
thoroughly unscientific and that a more scientific system
may operate to improve the steadiness o f employment in
much the same way in which scientific rate systems have
been used to increase the regularity o f use o f electric
power plants (p. 16).

The fundamental discrepancy between true
social costs o f unemployment and apparent pecu­
niary private costs is o f course accentuated by the
form o f the present wage contract. W ithout as
yet going into the merits o f such a proposal, let
us suppose that by voluntary action or collective
bargaining arrangements, firms were induced to
provide income or work for their employees
throughout all the year or all the business cycle.
Then not only would the burden o f the worker’s
maintenance be spread differently between the
workers and the employers in the industry in
question, and among the other workers and em­
ployers who make up the community at large, but
in addition the use which the employer would
make o f labor might be different. Moreover his
production or sales decisions might very probably
be appreciably affected.
Today in a depression, a firm w ill for the most
part not hire a man unless in some sense it expects
to receive in value a return commensurate with
his fu ll wage. N ot so does it act with respect to
the machinery it owns. I f, because o f slack times,
a piece o f machinery can produce only a fraction
o f the value fo r which it was originally purchased,
the firm w ill not thereby leave it in idleness. On
the contrary, so long as the machinery can produce
anything above its costs o f operation (including
o f course any extra deterioration engendered by
use) it w ill pay the firm to utilize the machinery.6
•T o some degree, therefore, we might expect some differences
in entrepreneurial behavior of firms in such rare industries as
shoe manufacturing, where much of the equipment is rented on
leases of relatively short duration. Even here the changed form
o f the contract, from ownership to leasing, has important reper­
cussions on how the various parties share the total social eco­
nomic burden.
A n important qualification to the theoretical
notion that firms do in fact disregard all truly fixed or overhead
costs is indicated later. Often, in imperfectly competitive mar­
kets, they use full-cost considerations in their pricing— for ra­
tional and irrational reasons.


I f an industrial worker has employment only
8 months a year and must lay off for 4, the true
cost or economic burden to society is the amount
o f production which he is prevented from produc­
ing during the 4 months o f idleness. Generally
speaking, we should expect this to be roughly
equivalent in value to the wage income that the
worker loses by unemployment plus an additional
wastage o f capital and nonhuman resources as a
result o f the instability o f production. Similarly,
if a longshoreman works only a few days a week,
the important costs to society are the foregone
value o f production and income on the days o f en­
forced idleness.
Our earlier quotation from J. M. Clark gives an
understatement o f these true social costs, because
the emphasis there is placed upon the necessary
maintenance expenditure o f the worker during
periods o f idleness. It is not improbable that an
industrial worker capable o f producing $3,000
worth o f output per year might, by practising
stringent economies, be able to maintain himself
and his fam ily with their health, skills, and (more
doubtfully) their morale intact on an expenditure
o f $2,000 per year. Nevertheless, the true cost o f
a year’s idleness o f such a man is still $3,000 and
not $2,000. And even if science were able to devise
ways o f costlessly putting men on ice, to hiber­
nate during slack times like bears during the win­
ter, the costs o f idleness would still be the same.7
W e feel it necessary to expound at some length
these almost trite, fundamental economic princi­
ples because only in this way can a number o f cur­
rent misconceptions and distorted emphases be
avoided. Thus, it is quite false to think that the
social cost o f instability would disappear com­
pletely if the employer were made to pay the work­
ers’ salary during periods o f lay-off. Actually,
this might be a highly desirable policy, because*
* This is all the more evident i f we apply the argument to the
less controversial and emotional problem o f a nonhuman re­
source like land. I f a 100-acre field neither gains nor loses in
productivity by being le ft fallow for a season, can we say that
there are no costs involved in its idleness just because no outlay
on maintenance is required? The answer is “ N o.” The potential
crop of that year is lost forever. I f the land actually goes to
weeds and deteriorates through nonuse, the costs are that much
I f there has been a real change in society’ s desire or tech­
nology so that the land or worker now has a lower potential
economic productivity, then the waste due to idleness is, of
course, equal only to his new potential economic productivity.


the worker may be least able to bear the cost o f
idleness; and because society may deem it desir­
able fo r the employer to shoulder part o f the cost
in lower business profits, or wish the burden to be
shifted in part forward to consumers and the gen­
eral public in higher prices, or wish the burden to
be shifted backward in reduced wage rates fo r all
workers (including those who continue to hold
steady job s). But if the workers’ incomes were
maintained, though they are idle, the social wast­
age o f productive resources would still be borne
by society as a whole.
The total social cost is not changed in real prod­
uct terms by different modes o f sharing the bur­
den o f idleness. The social cost for the com­
munity as a whole w ill remain unless greater sta­
bilization o f jobs and production is achieved. It
is not enough merely to transfer the burden from
Peter to Paul. (Perhaps we should not say
“ merely” since it does make a great deal o f eco­
nomic, political, and social difference just how
equitably or inequitably economic burdens are
shared between the Peters and the Pauls o f d if­
ferent economic levels.)
W e do not deny that different modes o f sharing
the burden can have considerable repercussions on
the total amount o f the burden. For example,
shifting part o f the burden o f depression unem­
ployment from the workers to the Government
may, depending upon the method o f finance, re­
duce the amount o f unemployment. Or making in­
dustry bear the costs o f certain kinds o f seasonal
irregularity o f employment may provide just the
stimulus necessary to cause the introduction o f
effective stabilization programs.
In brief it is the effective carrying out o f pro­
ductive employment rather than merely the pay­
ment o f wages that reduces the social costs o f idle­
ness and instability. Income maintenance with­
out productive employment stabilization is only a
half-w ay measure which transfers the economic
burden o f waste and minimizes its social impact,
but fails to diminish it.
When, as above, we speak o f the economic costs
o f idleness, we must be careful to distinguish be­
tween various kinds o f idleness. O f course, no one
can work 24 hours a day. The hours spent in sleep
are not wasted, any more than is the time spent in
leisure on Saturday afternoon and Sunday, or on
holidays and vacations. W e need not regard base­

ball pitchers who go hunting during the weeks fo l­
lowing the W orld Series as wasting their time, any
more than we would consider firemen on their way
back from a fire or for that matter firemen playing
checkers while waiting around fo r a new alarm,
as being unproductive.
In other words there are unavoidable cessations
o f activity which are an intrinsic part o f certain
productive activities. A ll cost comparisons are
relative. It would be pointless to compare our ac­
tual national output with that which could be ob­
tained if the laws o f thermodynamics were other
than they are; or with what we could produce i f
no one required sleep and desired leisure; or with
what would be producible if the seasons were con­
stant. To the extent that work interruptions are
unavoidable and intrinsic, it w ill make for clearer
thinking if we avoid the term “ idleness” and “ eco­
nomic waste.”
Also, to the extent that curtailment o f labor re­
sults in a reduction o f human disutility or, what
is almost the same thing, an enhancement o f the
utility o f leisure—to this extent it would be ob­
viously incorrect to regard the resulting loss o f
economic output as an equivalent total social
waste. Thus, nobody laments the fact that our
economic system fails to provide 84 hours a week
o f work for all, or fails to find work for a subway
attendant in between stations. There are only so
many activities that human beings can be reason­
ably expected to attend to at any one time.
Involuntary idleness such as is encountered over
the business cycle or in many highly seasonal in­
dustries presents little or no saving grace in the
form o f reduced disutility. Rather does our meas­
uring o f the cost o f idleness by the value o f lost
output understate the true loss. In addition there
is an extra psychic loss inherent in unemployment
itself. A man thrown out o f work against his
w ill is not on a vacation. In the present state o f
our society, work under reasonable conditions up
to some 40 hours per week and 50 weeks per year
is not a curse but a boon and a benefit. The social
gain o f transferring a man from frustrating in­
voluntary unemployment to purposeful productive
employment may even be greater than the value o f
the goods produced.
W e may summarize our discussion o f the over­
all economic cost o f instability briefly as follow s:
(1) The primary economic cost is measured by the

loss o f national output resulting from unnecessary
idleness; (2) in addition there is a secondary cost
involved in the individual misery and social dis­
organization which grows out o f idleness itself.
The intermittently employed worker suffers
from instability prim arily from the fact that his
pay largely ceases during periods o f unemploy­
ment. T o some degree unemployment insurance
benefits, home or work relief, and severance pay
may help to keep his income from falling below an
intolerable minimum; but only to a limited degree,
since coverage is incomplete and o f limited dura­
tion, and rates are deliberately set low in relation
to full-tim e earnings.
It appears in general to be an empirical fact
that workers subject to frequent lay-offs over the
year and over the business cycle tend to fare badly
in terms o f average rate o f earnings over the whole
year and over the complete business cycle. But
it is not at all obvious in theory that this should
be so. It could be argued, and it is often argued,
that competition in the labor market w ill cause
higher hourly rates o f pay to prevail in unstable
occupations so as to compensate for their unsteadi­
ness o f employment. The mechanism bringing
this about is supposedly the fam iliar one whereby
workers refuse to go into industries offering less
total compensation over time than prevails in
those other industries which offer steady, fu ll­
time employment; and in refusing their supply,
workers cause wages to be bid up in the highly
fluctuating or irregular industries.
Before turning to the available statistics upon
the subject, let us point out the rather artificial
set o f theoretical assumptions necessary to achieve
this result. Firstly, the cyclical rhythms in
activity o f the industry in question must be o f
sufficient regularity so that workers deciding
whether to enter or leave the industry can make
some sort o f an approximate calculation as to the
hourly rate which w ill in the future yield average
earnings comparable over time to stable occupa­
tions. Perhaps to some extent seasonal (building
trades for example) and shorter rhythms are o f
sufficient regularity to be forecast by the workers
to a limited degree, but the vagaries o f the busi­


ness cycle and other fluctuations preclude even this
Furthermore, there is the second im plicit as­
sumption that job opportunities are so plentiful
that workers can afford to pick and choose between
different industries and occupations. During the
past few decades, this has been far from the truth.
Often workers have been faced with the choice
o f accepting precarious unsteady employment, or
none at all. However, if high employment con­
ditions should come to prevail, then this second
hypothesis would become more nearly true.
Thirdly, an equalization o f average earnings
through changes in the supply o f workers going
into different industries implies that wage rates
are set in different parts o f the labor market by
the operation o f competitive supply and demand.
Actually, and today this is so obvious that we need
not elaborate, wages are to an important degree
set by the forces o f collective bargaining and are
a resultant o f the pressures exerted by union and
management organizations.
Finally, there are always individual differences
in ability, training, and opportunity, all o f which
tend to create inequality in the earnings o f differ­
ent kinds o f workers. Even if all jobs were equally
stable, we should still expect important, persistent
differences in earnings in different fields. How
then can we tell what part o f the actual reported
differences in earnings are due to different degrees
o f instability o f work, and what part to other
factors? The answer is we cannot, certainly not
with quantitative accuracy.
One thing, however, is clearly apparent from
statistics relating to annual hours and earnings in
industries characterized by different degrees o f
cyclical and seasonal variability.8 There appears
to be little tendency for hourly rates to adjust
themselves in different American occupations so
8 The W ashington staff of the guaranteed wage study has tried
with little success to find occupations which are alike in all im­
portant respects except for varying degrees of stability of em­
ployment in order to make such estimates. The data examined
w e re : (1 ) From the Censuses of Manufactures, 1929, 1933, 1935,
1937, and 1 9 3 9 : total pay rolls, numbers of employees month by
month and average annual number of employees for selected in­
(2 ) From Bureau of Labor S tatistics: average hourly
earnings fo r industries selected for (1 ) and studies of annual
earnings of employees in selected industries, published in the
following issues o f the Monthly Labor R eview : February 1940,
pp. 4 0 1 - 4 0 9 ; January 1940, pp. 1 7 2 -1 8 2 ; April 1939, pp. 7 8 1 7 8 8 ; October 1939, pp. 9 2 1 -9 3 1 ; December 1939, pp. 1 4 7 0 -1 4 8 2 ;
July 1937, pp. 2 9 - 3 7 ; July 1939, pp. 1 6 3 -1 7 5 ; M ay 1936, pp.
1 3 3 3 -1 3 3 5 ; December 1938, pp. 1 3 9 3 -1 4 0 8 ; October 1940, pp.
8 2 3 -8 3 3 .


that average annual earnings over time are equal­
ized in industries o f different degrees o f
Some o f the industries with most intermittent
employment—especially those in rural agriculture
areas o f the South—also have the lowest hourly
rates; while some o f the highest hourly and weekly
rates are to be found in lines o f activity which are
most stable in employment.
Logical purists may assert that the differences
in average earnings over time are all due to other
factors; and that hourly rates have adjusted them­
selves over what they would otherwise have been,
not so as to equalize earnings, but so as to com­
pensate for variability o f employment. The form
o f this assertion makes it impossible fo r anyone
either to verify or refute it. But such facts and
analysis as have come to our attention incline us to
the belief that any tendency fo r the hourly wage
to rise so as to compensate fo r unemployment is
only o f a weak and partial character.
B y and large, therefore, we incline to the conclu­
sion on factual and theoretical grounds that the
primary burden o f instability o f employment falls
upon the worker and his fam ily in the form o f
reduced average earnings over the long run. In
terms o f the equity considerations which underlie
the modern insistence upon progressive taxation
according to ability to pay and upon the social
desirability o f keeping up the standard o f life o f
low-income families, placing the burden o f unem­
ployment wholly upon the worker represents the
least desirable national policy, and one which ag­
gravates to a maximum the onerousness o f the
given pattern o f instability.
It does not follow necessarily from this that the
best economic policy to remedy this situation would
be one o f raising standard hourly rates to what­
ever level is necessary to compensate for insta­
bility o f employment. W e do not say this merely
because such a solution would involve extreme
changes in the present wage set-up o f American
industry. Grave inequities may often justify
drastic action. More important is the considera­
tion that simply raising wage rates without reduc­
ing instability and idleness only shifts the burden
off the worker’s shoulders but may fa il to reduce
the economic dollar value o f waste. This would
tend to be true unless indeed there were some
valid reason to expect that raising hourly wage

rates would by itself tend to reduce the average
instability o f production. Moreover, we need to
consider the relative merits o f raising wage rates
and o f changing the wage contract in the direction
o f guaranteeing longer periods o f employment
as means o f prom oting stable production.9
These questions we must defer until chapter Y .
But there is one aspect o f the problem which
deserves mention at this point. Under some cir­
cumstances raising the hourly wage rate may actu­
ally tend to increase the total o f idleness—espe­
cially where the problem o f “ casual employment”
is involved. B y “ casual employment” is meant
prim arily a condition where (a) workers are in­
termittently hired for short engagements, and (6 )
where the first worker who happens to present
himself is likely to get the job. A surplus re­
serve o f workers often results from higher rates
o f pay, especially if there is general unemploy­
This line o f reasoning is abstract and oversim­
plified. It should not be pushed too far. But
it does indicate one aspect o f reality, and it does
indicate that any policy o f raising wage rates
should be accompanied by supplementary policies
designed to reduce the total pool o f unemploy­
Even if normal annual earnings were maintained
in unstable jobs by means o f higher rates o f pay
when working, there would still remain the evil
o f irregular earnings. An ideally calculating in­
dividual could perhaps be relied upon to budget
his expenditure in equal amounts throughout the
year; or in occupations subject to much longer
rhythms, over the whole cycle. But for ordinary
human beings spending patterns tend to follow
closely upon their current income, so that uneven
income payments result in ups and downs in living
Added to the evil o f variability o f work and
pay, there is the attendant feeling o f insecurity.
W ithout some tangible advance guarantee, for
every worker who is actually fired a number o f
others may quake in their boots. Living appre­
hensively from day to day, the worker cannot
• A further drawback to raising hourly rates is that workers
differ in their lay-off experience according to seniority and other
10 A classic case is that o f the London dock and wharf workers,
analyzed alm ost 40 years ago by W . H . Beveridge in his significant
work, Unem ploym ent: A Problem of Industry (1 9 09 and 1 9 3 0 ),
p. 107.

efficiently make financial plans for the future,
cannot undertake advantageous long-run commit­
ments with respect to home ownership, life insur­
ance, and other desirable forms o f personal con­
sumption and saving.
T o be sure, form al and inform al seniority
practices already serve to ameliorate, in part, the
universal fear o f unemployment. But there still
remains a large residue o f insecurity, which, tak­
ing the long view, we must regard as partly un­
necessary. This shows that there may even be
merit in those limited guarantee plans which do
not go much beyond explicitly guaranteeing job
security to those who already in fact largely en­
joy it. The mere announcement effects may be
reassuring to some degree.
The question may be raised whether stabilizing
employment and income over time and reducing
job insecurity w ill serve to increase or reduce the
average propensity to consume out o f a given
income. The answer to this question, which has
a bearing on the problems discussed in chapter
IV , depends upon a nice weighing o f conflicting
quantitative tendencies. On the one hand when
people are reduced from a high income level to a
lower one, they probably still try to maintain as
best they can the higher standard o f consumption
to which they have become accustomed. There­
fore, because o f the “ ups” in the “ ups and downs”
o f income, there is a tendency for average saving
to be lower and the average propensity to consume
to be higher than with stable incomes. On the
other hand the persistent fear o f unemployment
tends to cause people to try to save more out o f a
given income.
He would be a rash man who would venture a
confident definitive answer to the question o f which
tendency is the stronger, no' satisfactory statistics
being available. Since there appears to be no
strong presumption upon either side, we may ten­
tatively cancel out o f our appraisal any claim
that guaranteeing wages w ill have stimulating or
hampering effects upon saving habits. (T o some
extent steady wages improve the credit position
o f workers and enable them to invest in consumers
capital goods such as housing and autos. Such
an increase in investment implies a higher rate
o f effective demand.)
Guaranteeing employment to a lim ited number
o f employees raises some o f the same policy prob­


lems involved in excessive seniority provisions.11
Adm ittedly, we need not argue that everyone must
be dragged down to the level o f insecurity o f the
least fortunate. Having granted this, however, we
must still go on to point out the possible evil o f
carrying seniority and wage guarantees to a fa ­
vored group so far as to create in effect an economic
caste system, in which one fortunate privileged
group is protected completely from the vicissitudes
o f economic life, at the expense o f throwing the fu ll
burden on those left without protection. Some
underemployment for all may be preferable to
total unemployment for a minority. I f there must
always be an irreducible minimum o f the working
force unemployed, it would be far better fo r their
numbers to be made up o f a revolving group o f
different people, with no appreciable group being
unemployed for very long. During the 1930’s,
those who had been unemployed the longest had
the greatest difficulty in finding jobs after business
demand began to recover. They were beginning
to form part o f the so-called hard core o f unem­
ployables, until the high level o f wartime demand
melted the core and proved their employability.
This points a possible way out o f the dilemma
that giving security to the m ajority may inequita­
bly and cumulatively concentrate insecurity upon
an unlucky m inority: the maintenance o f a high
level o f over-all effective demand by bold public
policies w ill serve to help those recently hired
employees who lack seniority and who cannot
qualify fo r guaranteed wages.
In concluding this discussion o f the evils o f job
insecurity, we must point out that this is not a
matter o f concern only to the workers involved.
The employer is vitally affected by the workers’
mental state in this regard. On the one hand,
from a realistic hard-boiled viewpoint there is
little doubt that fear o f losing one’s job sometimes
acts as a whip to spur the worker on to more effi­
cient production. Fear o f discharge fo r cause cer­
tainly acts in this direction. But fear o f lay-off
is quite another matter, except to the extent that
the order o f retention o f men and rehiring is made
to depend upon demonstrated efficiency. Even
u I t is not a t all paradoxical th at even recently hired workers
tend to favor seniority rules. They hope to possess seniority
themselves some day.


in the fairly rare industrial situations where labor
is in fact laid off in order o f inefficiency and re­
hired in order o f efficiency, there is always the
counter tendency that tense and insecure workers
may over the longer run be less efficient rather
than more efficient producers.
Neither o f these last points is so telling as the
fact that increasingly in modern industry form al
or inform al seniority rules determine the order o f
a worker’s lay-off, rather than his own effort and
productivity. No worker feels that the chances
o f retaining his job are prim arily dependent upon
his own efforts. But all the workers together often
feel—rightly or wrongly—that by their behavior
they can stretch out the work to be done and pro­
long the average period o f employment o f the
whole group. In order to make jobs last they w ill
consciously or unconsciously slow down their
efforts—with detrimental effects upon productiv­
ity, costs, and profits. And such is the group
solidarity o f any set o f men working in close con­
tact that even those workers with high seniority
and no fear o f unemployment w ill actively and
passively pursue these same tactics; fo r just as
young workers look forward to the time when
they w ill have gained seniority and act accord­
ingly, so too do the old-timers remember back to
the days when they were at the bottom o f the lad­
der. Besides, rarely does one have so much senior­
ity but that he is outranked by someone else, and
even his job may be thrown in jeopardy whenever
there is a really deep falling off in business activ­
ity. Given the above set-up, increasing the work­
er’s feeling o f security by means o f guaranteed
wage plans may contribute to an increase in labor
This completes our brief survey o f the ways in
which the economic burden o f unemployment tend
to fa ll with heavy weight upon the workers;
through (1) reduced earnings, (2) loss o f oppor­
tunity for useful and satisfying activity, with
attendant costs to the community at large, (3)
through variability o f the receipt and expenditure
o f income, and (4) through a widespread feeling
o f insecurity and tension among both those em­
ployed and those unemployed.
W e turn now to an examination o f the burden
experienced by the employing industry.

The burden o f unemployment fallin g on the
workers is only part o f the total story. Heavy un­
employment causes national income to fall sharply.
During such times industry is operating at low
capacity levels. The rewards to property decline.
Historically, there seems to have been a rather
remarkable constancy in the proportionate divi­
sion o f the total national income between personal
effort (wages, salaries, and personally earned
entrepreneurial profits) and property income
(interest, net rents, and profits com bined). It
appears that the burden o f heavy unemployment
tends to be parceled out in something like the same
proportion between property and labor income.
I f we take property income as a whole, probably
similar conclusions can be drawn in the case o f
seasonal and other noncyclical idleness. I f these
irregularities cause an annual loss o f national in­
come and product o f some billions o f dollars, an
appreciable fraction takes the form o f lower earn­
ing returns to property income receivers. Success
in a thorough-going stabilization program would
mean more stable and probably higher profits over
the cycle as well as higher wages. Therefore,
both labor and management have a mutual stake
in ironing out irregularities in production and
W e have seen that the average take-home pay
tends to be decreased by instability o f employment
in different industries. W hat may we infer about
the profit rate in industries which are subject to
the greatest fluctuations in activity ? Can we ex­
pect that the effective maintenance o f guaranteed
wages would be at the expense o f the profits now
earned by variable industries?
T o the extent that any wage or job guarantee
induces, accompanies, or follow s upon successful
stabilization o f production, the second question
answers itself. I f steady production at a high
level tends to increase labor efficiency and to reduce
expensive turn-over, the program may much more
than pay fo r itself. But i f we must assume that
guaranteed wage income is maintained in indus­
tries that are still subject to irregularities o f de­
mand and production, the answer to the question
o f whether the burden w ill fall on profits is not
so simple. It depends in part upon the answer


to the first question as to how profit rates have in
the past accommodated themselves to differing de­
grees o f instability.
I f we select those industries with the greatest
cyclical or seasonal fluctuations and compare their
profit rates with steadier industries, there does not
appear to be any strong relationship between
profits and instability. F or the period 1935-39,
which includes a recession as well as years o f ex­
pansion, the average, profit rate o f 10.1 percent fo r
all durable goods hardly differs from the 9.8 per­
cent fo r all nondurable goods. Automobiles, one
o f the most strongly cyclical and seasonal indus­
tries, has among the highest rates o f profit, whereas
iron and steel, also a cyclical industry, has rather
low profit rates.1*
I f industries which had previously been stable
were suddenly to become cyclically or seasonally
irregular, then profits would immediately be a f­
fected adversely. Something like this probably
happened as a result o f the unexpectedly deep de­
pression o f 1929-33, profits in many lines being
very hard hit. But by and large, unstable indus­
tries have a history o f being unstable. When
capital chooses between going into the canning
industry and some other line, it does so with the
expectation that supplies and operations w ill there
be bunched into a relatively few months o f the
year. Similarly, an industry like baking is ex­
pected to be fairly stable, both seasonally and
T o the extent that these expectations are cor­
rect—and they certainly are not necessarily so—
there is a tendency fo r profit rates to be equalized
(over the cycle and year) by the competitive move­
ment o f capital between and among industries.
That being the case, the residue o f the economic
burden o f idleness that is not thrown upon the
workers in the given industry—this residue is not
borne by the industry’s capital. Instead it is
shifted forward and backward to workers and
investors elsewhere.
In overcrowded lines o f activity where rivalry
is very keen and profits are chronically low, the
cost o f even customarily expected fluctuations in
production may not be allowed fo r in price set­
ting. Many o f our industries with the greatest
“ Unpublished study o f Office o f Price Adm inistration, entitled
“ Return on Net W orth, Before and A fter Taxes, 1 9 3 6 -4 4 , 2 ,500
Leading Industrial Corporations.”


amplitude o f seasonal fluctuation happen to meet
this description at least in part. However, for
the most part, the low profits experienced in these
fields ought properly to be kept analytically sepa­
rate from the fact o f seasonality o f operations.
Were the same total level o f demand to be spread
evenly over the year or cycle, while at the same
time the conditions o f over-entry into the industry
and past excessive investment were yet to prevail,
we m ight still expect profits to be low. A real
exception to this statement is provided by the case
in which people are encouraged to overinvest their
capital in an industry because o f the appearance
o f high profits during the short-lived busy season.
This would be the counterpart o f a similar possi­
bility in the labor field, where workers overcrowd
an industry because o f short-sighted concentra­
tion upon the transitory high hourly rates to be
earned fo r a few months o f the year or a few years
o f the cycle.
Other fields are to be found such as durable con­
sumer goods and chain department stores where
operations show a distinct seasonal and cyclical
pattern but where profits are nonetheless fairly
high. In many markets one or a few firms occupy
a strategic position o f dominance by virtue o f effi­
ciency o f operation, advertising, research, trade
marks, patents, and so forth. New firms are not
able to come in and compete away the monopoly
or quasi-monopoly returns o f these concerns.
From the analysis o f the last section, a few ten­
tative hypotheses may be drawn as to the possible
effect o f introducing guaranteed wages upon the
profit position o f unstable industries. Depending
upon the variability o f the industry and upon the
limitations placed upon the guarantee, we could
expect profits to fa ll in the short run after the
plans are first put into effect—unless indeed the
plans induced an increase in efficiency. In the
longer rim, and to the extent that capital can be
made mobile, capacity and output would gradually
shrink in the more variable industries.
More and more the burden would then be shifted
forward to the consumer through higher prices, or
backward upon wage rates in general—not through
actual pay cuts, perhaps, but through a slowing up
o f the rate o f increase o f real wage rates. Part o f
the burden might well fall upon monopoly profits.
In fact the cut might be covered by increased


Nevertheless the case should not be overstated.
Even if profit rates were equalized over all in­
dustries in the long run, we could not conclude
that profits would necessarily escape all the bur­
den o f the extra costs entailed by guaranteed
wages. True, the rate o f profit in the particular
unstable industries would be relatively unaffected.
This does not preclude the very real possibility that
the “ equilibrium rate o f profit” would be lower
under a regime o f over-all guaranteed wages than
under the present form o f the wage contract where
labor can be made a variable monetary cost.
There is no reason why the historical proportion
between labor and property income would neces­
sarily be preserved in the face o f so drastic an
institutional change. In technical terms, the “ im­
puted net productivity” o f capital depends very
much upon wage rates, collective bargaining, labor
“ productivity,” taxation and other cost conditions.
Under guaranteed wages, we cannot tell with cer­
tainty whether equilibrium profit rates would rise
or fall. Any possible effects upon profits would
have further repercussions on consumption, sav­
ing, and investment propensities, as we shall see in
chapter IV o f this report.
Probably, as we have seen, workers now directly
bear the major cost o f instability. Also, it is clear
that the portion which workers do not bear may
in part be shifted off the shoulders o f the em­
ployers directly concerned to consumers and to
industry in general. But still there remains some
element of cost to the industry directly involved.
Is it not to the selfish advantage o f the industry
itself to regularize its activities by means o f sta­
bilization programs? The answer is—to some de­
gree—yes. Doubtless industry is already pursu­
ing many such policies; the observed degree o f ir­
regularity o f operations in our economy is by
no means the maximum conceivable.
Doubtless, too, much more remains to be done
in this connection. Business management is far
from omniscient. Custom, ignorance, and inertia
play a role in preventing companies from actively
undertaking policies which are to their own maxi­
mum long-run profit advantage. Often companies
are not fully aware even o f their own irregular
pattern o f operations; many devote far less atten­
tion to stabilization programs than to other as­
pects of sales promotion, product development and

research, quality control, and cost accounting. The
pressure of management groups such as the Ameri­
can Management Association, the Chamber o f
Commerce, and the Committee for Economic De­
velopment, and the pressure o f organized workers
through collective bargaining, and o f government
and the public-at-large, is all to the good in spur­
ring corporations on to studying the problem o f
further stabilization programs. Engineering and
efficiency studies have time and again shown that
the surface is as yet hardly scratched. When every
corporation o f any size has a major executive and
sizeable staff working creatively upon this prob­
lem—then and only then can we expect even the
self-interest o f the corporation, to say nothing o f
the economy at large, to be well served.
We can expect that the obvious stabilization
policies, which hold out immediate economies with
little cost and no risks, have already been exhausted
in large part. What is needed is for management
to display with respect to thorough-going stabili­
zation efforts the same venturesomeness and im­
agination that it displays in prom oting a new prod­
uct or in risking the construction o f a new plant.
And yet, despite the above exhortation, there are
good reasons to believe that under present com­
mercial and financial institutional set-ups, the
hard-boiled single enterprise has only a limited
motive to pursue extensive stabilization policies.
During the last 25 years, good w ill, effort, initia­
tive, and intelligence have been applied again and
again to the problem. Yet plan after plan for
voluntary stabilization has petered out or become
a casualty o f business depression. W ith a loose
labor market and wages a variable cost, irregular
production is not always expensive production.
This condition may not last. W hile it would
certainly be premature to conclude that the busi­
ness cycle is a thing o f the past, nevertheless, both
public and private enterprise have learned much;
and today there is widespread recognition and de­
termination that we must do everything in our
power to prevent such catastrophic declines in
national income and production as characterized
the slump which followed 1929.
In any event, the longer that high employment
conditions are maintained, the greater w ill be the

immediate dollar-and-cents incentive to regularize
any remaining instability o f productive activities.
Depression conditions in the labor market have left
corporations with a heritage o f personnel policies,
which however appropriate they may have been
in the years o f labor surplus before the war, may
prove extremely costly in a high-employment
Let us take the automobile industry as a case
in point. Suppose manufacturers bow down to
the seasonal character o f auto demand once the
immediate postwar backlog o f demand has been
partially filled, and in consequence are able to
provide only some 8 months’ work to the average
employee. What w ill the result be? W ill
workers be compelled to lay off for 4 months, living
on unemployment-insurance benefits and previous
savings, and borrowing, or on relief? Probably
not, if jobs are really plentiful. Then, when auto
production is again resumed, many w ill be called
but few w ill answer. Large numbers o f workers
w ill have been attracted by job offers with other
concerns. Any firm with unstable employment
would have to raise wage rates and undertake
costly recruitment policies to keep a suitable labpr
During depressions the cost o f labor turn-over
to an employer consists prim arily o f the costs
to be incurred in securing and training a new
worker. In modern mechanized industry, where
a premium is placed upon general intelligence,
manual dexterity, and basic training in the use
o f nonspecialized machinery, it is not at all im­
possible that the expense o f training new workers
is a good deal less than would appear from many
exaggerated accounts. A fter not many weeks, a
worker transfered to a new department or hired
for the first time, may be nearly as efficient as he
is ever likely to be; especially since the novelty o f
a job often elicits an enthusiasm and zeal which
wears off with continued experience. Possibly
this explains why the alleged reduction o f cost o f
labor turn-over has been so ineffective in the past
as a spur to stabilization. But in a full-em ploy­
ment economy, every employer w ill be pitted
against every other employer in an effort to secure
more labor in a tight market. Labor laid off may


be lost forever. From any one firm’s viewpoint,
labor separations then tend to give rise to labor
shortages rather than simply to labor turn-over.
This leads us to stress once more that produc­
tion stabilization and the guaranteed wage involve
much more than business cycle unemployment.

The follow ing chapters undertake to show the rela­
tionship between guaranteed wages and other pro­
grams; also, the direct relationship to the over-all
level o f aggregate demand and unemployment,
and to the efficient use o f resources in a high-employment economy.

Substantial security o f income or employment,
or both, is everywhere more and more recognized
as a primary goal o f modern democratic societies.
This goal cannot be achieved by any one method.
In all modern societies many institutional arrange­
ments, programs, and procedures have been
adopted, designed to contribute to stability o f in­
come or employment. Am ong the most impor­
tant o f these are (a) a variety o f social security
measures and (b ) various programs to stabilize
employment in the individual firm and for the
economy as a whole.
Employment contracts under modern conditions
typically are terminable without notice or upon so
short notice as to give virtually no security o f ten­
ure. Nevertheless a substantial proportion o f
modern workers feel fairly secure in their jobs.
In many cases it may be assumed that employees
o f long standing regard their positions as more or
less permanent. Such employees are not likely to
fear dismissal fo r cause. In general, they are not
likely to be greatly concerned about lay-offs, ex­
cept in the case o f wholly unforeseen catastrophes
o f a character which are not regarded as very
probable. It appears true that human beings are
prone to be unduly optimistic and to underesti­
mate risks o f a character which they are not in
the habit o f facing more or less continuously. By
and large, employees o f long standing probably
experience a feeling o f security greater than is in
fact justified by the course o f events.
Employees who feel a sense o f security in their
job by reason o f long tenure are likely to under­
estimate the importance o f unemployment insur­
ance, and related measures, as means o f ensuring
some degree o f income security. F or these em­
ployees it is security and continuity o f the job


already held that is really important, not the eas­
ing o f transition to a new job.
But a large proportion o f employees are not in
this favored position. Typically their tenure o f
employment with any one firm is relatively brief.
F or many workers, a job is, even at best, a compar­
atively temporary thing. Lay-off or voluntary
separation is a continually recurring experience.
Workers who are accustomed to only short-period
job tenure doubtless fall into different categories
with respect to reemployment experience. Some,
by reason o f the character o f their occupation,
adaptability, resourcefulness, etc., expect easily
and quickly to find new employment. In the trans­
ition to a new job, unemployment insurance plays
an important role.
In bad times, however, reemployment, even for
the alert worker, becomes difficult if not impossi­
ble. Unemployment insurance becomes then an
important means o f support, just as it is fo r those
workers who encounter difficulty at any time in
finding new work. It provides, however, only a
fraction (usually 50 to 60 percent) o f normal earn­
ings, with maximum limits ranging from $13 to
$28 per week; while the maximum duration o f
benefits runs for only 14 to 26 weeks. It can serve
as an important stop-gap fo r seasonal and transi­
tional unemployment under conditions in which
opportunities for reemployment are reasonably
good—that is, in a relatively buoyant labor market
where aggregate demand is on a fairly satisfactory
level. In addition, the dismissal wage can help to
bridge the gap in the event o f technological unem­
ployment, consolidation o f firms, or a secular de­
cline in a firm’s business.
A considerable proportion o f the American
labor force, even though at times laid off, does not
typically change jobs. Such workers regard
themselves as “ attached to a firm” even though
they experience frequent and fairly long periods
o f unemployment. Thus, in the automobile in­

dustry in the period o f 1935-39, workers were
employed on the average fo r only about 75 percent
o f full time.1*
The table below gives a quantitative picture o f
the number o f workers o f different years’ service
with a large public utility system. In 1929, when
jobs were plentiful, the turn-over o f workers was
very high. Consequently, the percentage o f
workers with less than 1, 2, or 5 years o f service
was relatively high. During the depression, the
picture was changed greatly. Few workers had
been recently hired, and the number “ separating”
from the company was relatively small. Workers
with 5 years’ service began to be the rule rather
than the exception, so that even workers with high
seniority rating would have faced lay-offs if fur­
ther widespread contraction o f operations had
become necessary.
Percent of workers with varying lengths of service in a large
utility system

With 2
years or

With 5
years or

Number of
separations as
a percent of
number of




Percent of workers

With 1
year or

1932....... ..............
1938......... ............


In strongly organized industries, workers are
less vulnerable than form erly to dismissal, or dis­
charge “ fo r cause.” So long as times are good,
union workers with seniority are also protected
from lay-offs in a wide variety o f industries where
contraction o f output is a gradual affair involving
only the more recently acquired workers. There
are other industries, however, where technology
requires whole plants and units to be shut down
when output is contracted. In such industries,
even strong union organizations cannot protect
workers with high seniority rating from being
u The average weekly hours o f automobile workers for the
1 9 3 5 -3 9 period, using Bureau of Labor Statistics data weighted
by the Bureau’s employment indexes, were 36.1 . These were the
average weekly hours for employees working. T otal labor force
w as estimated from numbers o f employees reported to the Fed­
eral Bureau o f Old-Age and Survivors Insurance, with a correc­
tion for inclusion o f nonproduction workers. The automobile
labor force appears to have averaged about 18 percent more than
the average force at work, so that average weekly hours for the
whole force averaged about 3 0.6.

intermittently laid off—even in years o f fairly
high business activity.
The demand fo r a guaranteed wage is likely to
be strong in industries o f this type. Such workers,
to be sure, not infrequently take advantage o f un­
employment insurance and job opportunities
offered elsewhere in the interim period o f tempo­
rary unemployment. Y et a large proportion more
or less regularly experience temporary unemploy­
ment each year, and await a return to their old job
without obtaining, in the interim, work elsewhere.
T o repeat, it is particularly for workers o f this
character that the guaranteed wage plan makes a
strong appeal. These workers are, in a sense,
“ attached to a firm,” yet the number o f days worked
per year is low. The conditions o f the industry
prevent or make difficult a high ratio o f days
worked to working days in the year. I f the firm
could diversify its production so as to dovetail
employment throughout the year, a high ratio o f
days worked to working days could be achieved.
In view o f the character o f the modem labor con­
tract, it is probable that most employers have not
yet seriously tackled the job o f giving steady em­
ployment to workers regularly attached to their
firms. I f the labor contract were on the guar­
anteed basis, these firms would be compelled to
explore to the utmost ways and means o f finding
steady work fo r those “ attached to their firm.”
Where unemployment is prim arily a matter o f
seasonal fluctuations, and other types o f work in­
terruptions o f a short-term character, the guaran­
teed wage plan seems to be peculiarly suitable as
a device to help solve the problem o f job security.
I f under such conditions the guaranteed wage
became the rule fo r all competitors in an industry,
more and more those competitors would survive
who proved most resourceful in the development
o f stable, year-round employment. A t first, doubt­
less, relatively little progress would be made and
the guaranteed wage might prove to be a heavy
burden on the industry. This m ight involve a
rather drastic readjustment o f prices or wage rates
or both. Eventually, however, as more and more
firms increasingly solved the problem, costs would
be reduced. Accordingly prices could be lowered


again or wage rates raised, or both. The net social
gain would be steady year-round employment for
the workers and an enlarged real income for the
community as a whole.
In what has been said above, the assumption is
made that the guaranteed wage would be applied
to all, or nearly all, the workers employed by the
firm. But even firms with short-run irregularities
in employment have a certain residue o f workers
who are continuously employed. I f the concept
o f the guaranteed wage were applied only to these
workers, the plan would become at once more fea­
sible, but also would accomplish relatively little.
Similarly, with respect to industries afflicted with
cyclical unemployment, a guaranteed wage which
involved only that residue o f workers which a firm
can reasonably expect to hold through even a deep
and prolonged depression, would become highly
practical, but correspondingly also o f less value.
Nevertheless, even this limited concept deserves
consideration. It would indeed not solve the prob­
lem o f either income or job security. These diffi­
cult goals must be attacked from a great many
angles. The guaranteed wage is only one among
many approaches to the problem. Indeed, if too
much were attempted by this method, other more
promising methods might be seriously impaired.
The guaranteed wage, we believe, does have its
place as a part o f a larger program. Even the
minimum concept o f the guaranteed wage referred
to above could achieve something o f substantial
value. I f each firm gave assured employment to
that fraction o f its peak employment which ex­
perience indicates to be feasible and practical, a
form ally recognized status o f security might be
given to an appreciable fraction o f the entire labor
force. This would, at any rate, be something to
start with. The problem would then be sharply
posed: if such a fraction o f workers were protected
under the guaranteed wage status, what could then
be done (1) to provide in other ways (dismissal
wages, unemployment insurance and over-all sta­
bilization policies) as much security as is possible
fo r the uncovered employees, and (2) to expand
gradually the number coming under the guaran­
teed wage plan.


Comparison may usefully be made between (1)
the guaranteed wage plan, (2) unemployment in­
surance, and (3 ) a full employment program. In
making this comparison it w ill be helpful to as­
sume that each measure is a part o f a general
pattern in which each reinforces and supple­
ments the others as means to provide security for
workers. Thus considered, what can each o f
these three approaches contribute to the problem
o f security?
The full employment program aims to provide
security by ensuring a good market fo r labor
services. The goal is adequate aggregate demand,
so that workers can readily find and obtain jobs.
This plan does not guarantee a job to any individ­
ual. It provides a favorable market in which he
may seek a job. The mere fact that the aggre­
gate demand for goods and services is sufficiently
high to ensure a good market for labor services,
w ill not prevent fluctuations in employment in
seasonal industries. It w ill not prevent shifts
taking place between industries and between
regions. A man living in town X may not be
able to get a job in his particular skilled occupa­
tion in town X ; or anywhere if his skill has be­
come obsolete, or his demands exorbitant. Aggre­
gate over-all demand does mean, however, that
job opportunities are in general plentiful through­
out the Nation. A man cannot sit on his front
porch and expect just the job he wants to come to
him. But if he is alert and active, the market is
favorable. Labor is in good demand throughout
the country. There are many job opportunities
from which one may choose. And retraining pro­
grams, employment offices, travel allowances, and
adequate housing facilities (essential parts o f a
complete fu ll employment program ) should make
the task o f transfer to new jobs and other regions
relatively easy.
"Such in brief is the goal or function o f a fu ll
employment plan for job security. It does not
guarantee a job, and at best there w ill be unem­
ployment. In particular there w ill be seasonal,
technological, and transitional unemployment.
The plan thus falls short o f adequately meeting
the problem o f security. Something more is

The unemployment insurance program aims pri­
marily at a minimum o f income security, and does
not directly attack the problem o f job security.
The program assumes that workers w ill become
unemployed for all sorts o f reasons—seasonal fluc­
tuations, fluctuations in the business cycle, changes
in technology which throw people out o f work,
structural changes which adversely affect certain
regions, shifts in population, foreign competition,
etc. The program is not designed directly to re­
move any o f these causes o f unemployment. It is
designed merely to ensure a temporary minimum
income to workers who are out o f a job. As a by­
product, the program does indeed, it is now be­
lieved by most economists, make some contribution
(if properly financed) toward the maintenance o f
aggregate demand. But at best its contribution
to the maintenance o f purchasing power is rela­
tively limited, and its main function is to provide
a minimum income to those out o f work. T o re­
peat, the program is designed to give minimum in­
come security, not job security. The income re­
ceived is not paid in return for work. The pay­
ment is made basically in accordance with the
principle o f partial income maintenance,14 not in
accordance with the principle o f productivity.
I f now we extended unemployment insurance
(industry or firm financed) far beyond the limits
which are now actually applied in practice to the
point o f full coverage o f wage income fo r the
period o f a year or perhaps a minimum o f 40
weeks o f the year, instead o f only 50 or 60 percent
o f wages for 14 to 26 weeks, we should have ar­
rived, at least in terms o f the income receipts o f
the protected individuals, at the same point as
the guaranteed annual wage. Under the guaran­
teed wage, o f course, the worker not only receives
a continuous income payment during the period
fo r which the wage is guaranteed; he may also be
subject to the call o f the employer for the perform ­
ance o f work.
From one point o f view the guaranteed wage
can be looked upon as 100 percent unemployment
insurance, fo r at least a limited time. But it is
often more than that, especially where it involves
14 A rough calculation suggests that unemployment compensa­
tion covers less than a fifth, and possibly not much over a tenth,
o f the wage loss from all unemployment. The system is much
more effective in compensating total unemployment wage loss in
good times than in bad.

“guaranteed work” as well as income. It carries
the principle o f merit (or experience) rating to
its ultimate degree; the whole burden o f main­
taining the worker is assumed by the employer.
Any use he can make o f the workers is all to the
good since his labor costs go on anyway. Under
the unemployment insurance plan, the worker is
obligated, in return fo r income payments, merely
to register at the public employment office and
actively to seek work if it is available. I f work
is found, the insurance payments cease and wage
payments begin. Under the guaranteed wage,
wage payments continue with or without work,
but the worker is under obligation to work when­
ever the employer so directs. And especially if
the guaranteed wage is integrated with unem­
ployment insurance, as we suggest, he w ill also be
under obligation to seek work elsewhere.
The guaranteed wage plan, accordingly, as op­
posed to the principle o f unemployment insurance,
tends in the direction o f bringing work to the
worker in the employer’s establishment. Unem­
ployment insurance, through the unemployment
exchanges, seeks, on the other hand, to send the
worker to the job wherever it may be. This d if­
ference can, however, easily be exaggerated since
an employer under the guaranteed wage also may
seek to place his idle employees in jobs elsewhere
and with other establishments.151
Nevertheless, the guaranteed wage tends rather
more than unemployment insurance toward fixity
o f jobs in regions and establishments to which
work must be brought. The maintenance o f labor
m obility is no easy m atter; yet much could be
done to keep productive resources fluid in refer­
ence to changes in technology and in demand.
Employment offices, operated in conjunction with
unemployment insurance, if effectively managed,
aim to promote the movement o f workers from
old establishments and regions to new ones as
dynamic changes in products and in wants arise.
Under the guaranteed wage plan the main effort
is to provide work for the worker on his old job
or at least in the firm to which he is attached; un­
der unemployment insurance the emphasis is
placed upon connecting up workers and jobs in
any firm offering suitable work, preferably in the
19 See our policy recommendation in chapter V I calling for an
integration of unemployment insurance benefits and guaranteed


region where the worker is located, but if not there
then elsewhere, at least within reasonable limits.
T o sum up, a fu ll employment program is de­
signed to maintain, within reasonable limits, ade­
quate aggregate demand. Emphatically, it w ill
not guarantee every worker a continuous job. It
does no more than to ensure plentiful employ­
ment opportunities—a brisk demand for labor.
And in order to achieve reasonably fu ll and sus­
tained employment, a fairly high degree o f labor
m obility is required. A fu ll employment program
must therefore include, as a part o f the plan, re­
training provisions, travel allowances, and ade­
quate provision fo r working-class houses where
jobs are available.
Nevertheless, at best, there w ill still be seasonal,
technological, and transitional unemployment. A
fu ll employment program, therefore, leaves many
workers unprotected unless supplemented by a
well-developed scheme o f unemployment insur­
ance. Social security is therefore necessary, in
order that at least a minimum income w ill be re­
ceived by those workers who suffer the effects o f
the unavoidable unemployment which is a by­
product o f the manner in which production is
carried on under modern conditions. This insur­
ance o f a minimum o f income, since a job cannot
continuously be guaranteed to everyone, is the
right o f all workers, and is so recognized in all
modem democracies.

W ithin the framework o f a fu ll employment
program, supplemented by unemployment insur­
ance, a highly important function can be served
by the guaranteed wage. There arp already a
substantial number o f persons, including profes­
sional and salaried workers and some wageearners, who have achieved a fa ir degree o f job
security, if not in a form al guaranteed wage, at
least in its practical equivalent. This group could
doubtless be enlarged even without a fu ll em­
ployment program. Standing alone, however,
without the protecting influence o f a steady, brisk
demand fo r labor, any widespread expansion o f
unlimited guaranteed wages might encounter seri­
ous difficulties. W ithin the pattern o f a realizable
high employment program o f sustained aggregate
demand, the guaranteed wage could be extended
to include a fairly high proportion o f workers in
the labor force. F or some firms or industries the
number o f weeks guaranteed m ight be 40, fo r
others 45, and for others 50. The guaranteed
wage, safeguarded in view o f the risks involved
and properly integrated with unemployment in­
surance,16 could play a significant role as a means
o f providing income security. Most important o f
all, however, is the task o f securing contin­
uing high levels o f employment. Income security
cannot take the place o f steady productive

The subject matter o f this chapter, the quanti­
tative effects o f guaranteed wages upon total de­
mand and upon business cycle fluctuations, is
intrinsically complex and can only be analyzed in
rather technical terms. Perhaps it is fo r this rea­
son that the voluminous literature on guaranteed
wages scarcely scratches its surface. Nevertheless,
no economic analysis o f guaranteed wages could
be complete without coming to grips with the ques­
tion as to how effective such plans can be in reduc­
ing over-all unemployment and in moderating the
business cycle.
F or readers who are not interested in the techni­
calities o f analysis, a few o f our more important
findings may be briefly sketched. However, to ap­


praise their validity, there is no escape from the
more detailed analysis which follow s this section.
In this chapter we do not consider governmental
programs o f any kind. I f the guaranteed wage
were to be a govemmentally financed program,
that would be one thing; and the economic and
political implications o f such a plan would then
need to be examined. But this is not our concern
in this chapter. W e consider here the economics
o f a privately financed guaranteed wage. How
would a privately financed guaranteed wage, taken
by itself, affect (a ) the fluctuations o f the business
cycle, and (6 ) the level o f effective demand, pro­
duction and employment over the cycle. It is im­
portant, we repeat, fo r the reader to remember
lf The problem of integration is discussed in ch. V I.

that the problem before us is concerned exclu­
sively with the economic effects o f a privately fi­
nanced guaranteed wage.
Those who concentrate upon the expansionary
effects o f guaranteed wage payments, to the neg­
lect o f how these payments are financed, come out
with an exaggerated notion o f the efficacy o f wage
guarantees to combat depression and unemploy­
It is not inconceivable that the guaranteed wage
could be the means o f inducing (by providing
worker security and in other ways) a higher man­
hour productivity. But there is no evidence from
experience that increases in productivity, as such,
tend to iron out the cycle or to raise the level o f
employment over the cycle. Increases in produc­
tivity are important from the standpoint o f rais­
ing the standard o f living, but not from the
standpoint o f eliminating the cycle. Guaranteed
wage payments (whether they induce increased
productivity or not) may, however, help to iron
out the cycle if they are financed from reserves
accumulated in good years and paid out in bad
years; or they may, to some extent, raise the level
o f employment in the depression phase, through
the redistribution o f income when financed on a
pay-as-you-go basis.
The fact that a guaranteed wage plan might
more or less “ pay for itself” is certainly signifi­
cant. But only insofar as the plan redistributes
income over time, or else redistributes income be­
tween economic groups, w ill it have any effect
either on the stabilization o f employment or in
raising the level o f employment. Our tentative
conclusion is that the guaranteed wage, by itself,
is not likely to prove very effective either as a
means o f stabilizing the cycle or o f liftin g the level
o f employment over the cycle, although the guar­
anteed wage may be partially effective in regular­
izing seasonal employment.
W ith respect to the redistribution o f income,
nobody can say just what percentage o f the finan­
cial costs o f guaranteed-wage plans w ill fall on
corporate stockholders rather than on consumers
or wage earners. Except to the extent that the
costs fall upon net corporate savings (without
affecting dividends or interest outlay, or net cor­
porate outlays on plant, equipment, or inven­
tories), guaranteed wages may be regarded as a
form o f personal income redistribution. Such a

744765-47----- 4

redistribution may be highly desirable on social
grounds. But the available statistical data show­
ing (a) how people in different income classes
allocate their extra dollars between saving and con­
sumption expenditure, and (&) the relatively small
proportion o f the total national income flowing
to the high-income groups, suggest that such re­
distributions are o f somewhat limited quantita­
tive significance in raising the level o f over-all
purchasing power.
Apart from such personal redistribution and its
relatively limited effect, we conclude that in peri­
ods when net investment outlays for the economy
as a whole are deficient, causing a decline in em­
ployment and in business profits, the guaranteed
wage may, indeed, fo r a time maintain consump­
tion expenditure. F or this to be true in these
circumstances, the payments would have to be
financed from accumulated business reserves pre­
viously set aside to cover guaranteed-wage pay­
ments in the subsequent depression, or else from
current undistributed profits and depreciation
charges not invested in plant, equipment, or in­
ventories. Under the assumptions made (apart
from redistribution o f personal income via lower
wages or higher prices), these would be the only
methods o f finance, government support being
ruled out. But the amount o f guaranteed wages
that could be financed from depression business
profits and surplus would be quite limited, even
though no account were taken o f possible unfa­
vorable effects on the economy which such losses
might entail. And i f the amounts set aside in
reserves in boom years are large enough to cover
the risk involved, new problems are encountered
which are rather serious. W hile moderate reserve
accumulations could help to iron out the cycle,
large reserves (as we shall see in the discussion
which follow s) might seriously intensify the savings-investment problem. Thus, either way, there
are, we believe, rather severe limits to the extent
to which the guaranteed wage can iron out the
cycle or raise the general level o f employment over
the cycle.
W e do not wish to overstate or overemphasize
these somewhat pessimistic conclusions. Indeed,
in the discussion that follow s they are qualified
at many points. Nonetheless, we must once again
stress the limitations o f the guaranteed wage as
a remedy for the business cycle, and emphasize


the need for a well-rounded full-employment pro­
gram including both public and private policies
designed to keep our economy stable at a high
and growing level o f real income.
Let us begin our detailed technical analysis by
considering the simple view that guaranteed wages
and employment maintain incomes and jobs, that
steady incomes mean steady sales o f business,
which in turn give rise to high and steady em­
ployment. In short, jobs make markets, markets
make jobs, and so forth, indefinitely. Accord­
ing to this view, a serious depression like that
o f the early thirties is nothing but a vicious cir­
cle; for one reason or another, the public and
business has become frightened enough to con­
tract spending; this initial contraction o f spend­
ing has resulted in reduced levels o f business sales
and consumers’ incomes; and this situation tends
to perpetuate itself at low levels o f national in­
come and high levels o f unemployment.
Some such theory as this is widely held both
by many conservatives and many liberals. The
latter say, “ A ll we have to do to cure such a situa­
tion is to prime the pump fo r a little while. Once
the system gets back on its feet the Government
pump prim ing can stop because the new circular
flow o f income-sales w ill be able to maintain itself
at high levels o f employment/’
W e believe it fair to say that the m ajority o f
modern economic experts reject this view just
as they reject its oversimple conservative version
which goes something like the follow ing: “ Any
depression can be temporary if businessmen and
the public w ill keep their heads and realize that
prosperity is just around the corner. The Gov­
ernment should steer clear o f the whole situation,
except fo r a little necessary emergency action.
Then, if people w ill only act upon the assumption
that conditions are fundamentally all right, and
if they w ill only ‘buy now’ instead o f later, the
corner o f prosperity can be permanently turned/’
The m ajority o f modem economists, let us re­
peat, do not believe that such a theory squares
with the monetary, statistical, and historical evi­
dence accumulated by students o f the business
cycle. They find themselves forced to reject the
assumption that, like Gilbert and Sullivan’s allpow erful Mikado ( all we have to do is declare jobs


guaranteed, and ordering that this be done is just
as good as if it were done.
W e do not deny that there is a germ o f truth
in the above view point: Pessimism and reductions
in spending do involve some elements o f the
vicious circle character, and the descent into a
depression is o f a cumulative, self-aggravating
nature. But fundamental facts o f economic life
are ignored by this overly simplified theory. The
fact is that people do not spend all their income
on consumption goods and services. Retail sales
by business to the public constitute only a part
o f the total national income produced at high
levels o f employment. Around one-eighth o f na­
tional income,17 when employment is high, has
throughout our history o f the last half century
gone into the form o f investment goods or net
capital formation. And it is capital form ation
that basically represents the difference between
prosperity and depression. A ll the available sta­
tistical evidence shows conclusively that capital
goods and durable consumer goods experience
the greatest amplitude o f variation over the busi­
ness cycle. Moreover, this variation spreads
throughout the economy, in particular affecting
the volume o f nondurable consumption expendi­
tures and replacement capital expenditures, and
so it has a magnified effect on aggregate outlays,
income and employment.
F or the purpose o f this report, it is not neces­
sary to enter upon the controversy as to just what
the long-run prospects for investment are, or just
what in the past have been the primary causes o f
investment fluctuations. It is enough to record
the fairly substantial agreement o f economists
that among the important factors affecting invest­
ment behavior are scientific inventions, tech­
nological innovations, population movements and
grow th; changes in tastes; relations between d if­
ferent elements in the price, cost and wage struc­
ture; interest rates and availability o f capital;
investor psychology and businessmen’s expecta­
tions; attitude, legislative acts and policies o f
government; governmental public works and pub­
lic development projects; and so forth.
Now it is not at all clear how much, if at all,
the guaranteeing o f wages as such would affect
17 I f one preferred to relate gross investment to gross national
product, the ratio o f investment to national product would be
far higher.

the sum total o f these factors in a manner favor­
able to the maintenance o f the high levels o f total
outlays necessary fo r fu ll employment—if, with­
out guaranteed wages, otherwise adequate demand
wer^ inadequate. It is not even as yet clear in what
direction or to what degree the over-all balance
o f saving and investment would be affected by the
widespread adoption o f the guaranteed wage.
But cannot the follow ing limited case be made
fo r guaranteed wages: W ould not the widespread
adoption o f such plans at least succeed in stabiliz­
ing consumption, with the effect that fluctuations
in national income would then be confined to the
relatively small sector o f the economy—the cap­
ital-goods industries? Also, would not the suc­
cessful maintenance o f consumption moderate, at
least in the short run, some o f the wide swings
o f investment—those dependent upon the level o f
current business sales ? Finally, would guaranteed
wages raise the total level o f consumption over
the cycle, and so also lift the average level o f
These are separate but related questions. The
answer to the first is fundamental and prepares
the way to an answer to the others. I f it can be
shown that guaranteed wages would stabilize the
level o f consumption, much (though far from
enough) w ill indeed have been proved. F or under
the present system o f wage and job tenure, fluctua­
tions in the relatively minor (say, one-eighth) part
o f our economy concerned with net investment give
rise to “multiplied and amplified” fluctuations in
consumption as well. Thus if full employment
net national income in the postwar were about
$160 billion, and net investment were to drop
away to nothing, the loss to the economy would
not simply be around one-eighth o f national in­
come— or some $20 odd billion.18 As workers and
property-owners in the capital-goods industries
lost income and contracted their consumption ex­
18 Even when gross investment is positive in the sense that
some capital goods are being produced, net investment may well
be negative if the total value of capital goods output is less than
the amount of capital goods being used up. In view of the fact
that gross and net investment differ only by the fairly constant
magnitude of capital consumption or depreciation, absolute
changes in gross and net investment can be used interchangeably
for purposes of business cycle analysis.

penditure, there would be set in motion a chain
o f cumulative contractions in income which might
be two or three times as large as the initial decline
in investment expenditures. In short, a relatively
small failure in investment outlay tends to result,
under our present system, in considerably larger
changes in total income, because o f the “ secondary”
contraction o f jobs and consumption expenditure.
I f the consumption outlays could smoothly and
instantly rise whenever investment declines, we
should not experience any general decline in ag­
gregate demand in a prolonged depression. But
this is simply not possible. Individuals w ill not
suddenly change long-established customs and
habits with respect to the disposition o f their in­
comes between consumption and saving merely
because, from the social standpoint, the turn in the
cycle calls for an increase in spending out o f a
reduced income. Thus an offsetting increase in
consumption cannot and does not occur. Worse
than that, consumption actually falls off when in­
vestment declines, since unemployment and declin­
ing business prospects induce a decline in private
spending patterns.
This induced decline in consumption could in­
deed be avoided if, by some “ magic,” substitute in­
come payments could be found to take the place o f
the declining capital-goods pay rolls. These sub­
stitute income payments, since they do not corre­
spond to any productive output, would be in the
nature o f “transfer” payments. Ideally, they
might be financed out o f the stream o f saving which
always characterizes full-employment income
levels. By this “ m agical operation” the income
flow would be maintained even though net invest­
ment should fall to zero and cause considerable
primary unemployment. In short, the savings
stream, instead o f financing new investment, would
be transferred to idle workers and the owners o f
idle resources. Total consumption would thereby
be maintained.
Perhaps a bald statement o f the problem in these
terms may help to reveal the lack of realism in­
volved in over-simplified assumptions with respect
to the maintenance o f consumption and employ­
ment. Unfortunately, economic analysis o f guar­
anteed wages does not seem to substantiate the
claim that this device would, as a first approxima­
tion, necessarily tend to maintain consumption for


any appreciable period o f time at the appropriate
full employment levels, i. e., roughly at seveneighths 19 o f the full-employment level o f net na­
tional income.
T o illustrate the point, let us consider the case
where investment opportunities are only such as to
replace existing capital. It is not enough then for
all employers in the consumption goods industries
to undertake guaranteed wage plans. Rather, all
employers—in both consumption and capital-goods
industries—must carry through with such guaran­
tees. Total consumption and saving typically de­
pends upon total national income (at least as a
first approximation) in such a way that in order
to ensure a volume o f consumption equal to seveneighths o f full employment national income, the
actual amount o f national income accruing to peo­
ple must be eight-eighths of the full employment
level. I f investment opportunities are fo r the mo­
ment moribund, where is the “ missing eighth” to
come from ? 40
I f investment opportunities are temporarily in
large part saturated—plant and equipment hav­
ing been built up during the preceding boom
period to about as far as prevailing technology
justifies, and if houses, hotels, office and commer­
cial buildings have been constructed to the extent
(and in fact often farther than is) justified by
growth and the requirements o f prevailing stand­
ards—then investment outlays w ill decline even
though consumption expenditures could, in some
manner, be stabilized at the boom level. And, if
this is so— and the experience o f business cycles
fo r 75 years supports this analysis—then the pro­
ducers o f capital goods w ill not be able to continue
to operate at levels adequate to maintain their pay
rolls or to pay guaranteed wages to their employ­
ees. A nd when the market for the capital-goods
industries drops out, then a large fraction o f
the market for consumers goods w ill also disap­
pear. This is the situation which cannot be waived
by the over-simplified theory which holds that jobs
provide pay rolls, pay rolls provide markets, and
This includes local community and other governmental serv­
ices (education, for example) financed from personal taxes. In
modern communities this is one important w ay in which con­
sumers spend their incomes.
90 A ll through this analysis we are assuming, it is to be remem­
bered, that the guaranteed wage is financed by private industry
and not by the Government. I f consumption were automatically
maintained by Government outlay, the case would be entirely


markets in turn provide jobs. The overly sim pli­
fied version did indeed fit reasonably well into a
primitive economy where capital goods played no
significant role. And it is fo r this reason,
basically, that primitive economies, while poor,
nonetheless rarely suffer from unemployment.
I f the “missing eighth” continues to be lacking,
how can consumer outlay be kept up to the maxi­
mum level reached in the boom? This is the cru­
cial question: by what method o f financing is the
wage guarantee to be maintained? A nd yet
throughout most o f the literature on guaranteed
wages, this whole problem is either neglected
completely or passed over lightly. T o remedy
this defect, the rest o f our chapter w ill analyze
in some detail the effects o f different methods o f
finance—pay-as-you-go and reserve.
I f a guaranteed wage plan keeps a man from
being laid off and makes possible the maintenance
o f his income, then it is not unreasonable to expect
that it w ill result in an increase in his consumption
purchases over what they would otherwise have
been in the absence o f such a plan. So far, so
good—but we have not carried the analysis very
far if we stop with the expansionary effect o f
guaranteed wage expenditure.
I f the Government were paying the bill, not out
o f tax revenues, but by the printing o f crisp new
dollars or by loan-financing, that would be one
thing. The discussion o f the im plication o f such
a policy, together with relevant comparisons with
other antidepression programs (which might be
more justifiable and prom ising), would take us
very far afield and far beyond the scope o f our
present study. When only private finance is in­
volved, it is necessary to give attention to some
important factors which offset the favorable in­
come maintenance effects, as we shall see.
Before entering upon a discussion o f reserve
and pay-as-you-go financing, we must digress to
consider a point which is given considerable
weight in the literature o f guaranteed wage plans.
Such programs, it is claimed, often more than pay
fo r themselves because o f the production efficien­
cies resulting from lower labor turn-over, greater

labor efficiency, and fuller utilization o f capital.
Especially in connection with the ironing out o f
seasonal and irregular fluctuations is this likely to
be the case. I f the general business cycle is not
brought under control, it is more doubtful that the
increase in efficiency w ill be nearly as great as
the costs o f maintaining income payments in the
face o f conditions which fluctuate independently
o f the firm’s control.
However, in any case there may be some sav­
ings in cost to offset against the expense o f guar­
anteed wages. The question w ill inevitably be
raised, therefore, as to whether widespread guar­
anteeing o f wages cannot by itself iron out the
business cycle, or at least maintain income steady
throughout the cycle, and do this without any net
cost to the business community. The remaining
paragraphs in this section aim to throw light on
these questions and clear the ground for the anal­
ysis o f reserve and pay-as-you-go financing.
I f the savings in cost through increase in effi­
ciency were very important, the individual em­
ployer would be helped to finance his guaranteed
wage, but it would not necessarily solve the prob­
lem o f unemployment for the economy as a whole.
Increased labor productivity, meaning among
other things that less employment is provided by
a given volume o f output, would raise the same
problems o f unemployment and purchasing power
as technological inventions. About this there is a
large literature, the consideration o f which would
lead us rather far beyond our immediate task.
The mere reference to this literature is, however,
sufficient to show that in the absence o f a positive
full employment program, it cannot safely be as­
sumed that technological and other developments
designed to increase worker productivity, would
automatically increase and stabilize aggregate em­
ployment and aggregate demand in the economy
as a whole.
I f the guaranteed wage could induce an increase
in productivity sufficient to cover its cost, this
would be a great social gain leading, as with all
advances in efficiency, to a potentially higher real
incom e; and in an expanding economy in which
technologically displaced labor quickly became
reabsorbed, this potential would actually be real­
ized. But the mere fact that a guaranteed wage
plan or an invention “ pays fo r itself,” w ill not
alone tend to reduce the fluctuations o f the cycle.

There is no evidence from past experience (nor
could it be expected on grounds o f general anal­
ysis) that gains in productivity tend to have this
Nevertheless, it is possible fo r the cost-savings
o f guaranteed wages to be used in such a way as to
promote stability over the cycle—that is, by in­
vesting the financial cost-savings in good times
into a reserve fund out o f which payments are
made in depression. This leads us into the whole
problem o f pay-as-you-go and reserve financing.
A fter we have analyzed these devices, we shall
return to efficiency cost-savings.21
There are two methods by which widespread
guaranteed wage plans could be privately
financed. First, there might be some sort o f
reserve plan, according to which funds would be
collected during the expansionist boom phase o f
the business cycle; and then during the contractionist depression phase o f the cycle, these funds
would be dispersed in the form o f guaranteed
wages. This same reserve principle is already in
effect in connection with our Federal and State
unemployment compensation program. The best
case could be made fo r the anticyclical reserve
method o f financing if our economic system could
be regarded as suffering only from cyclical swings
above and below some “normal high-employment”
The second general method o f financing guar­
anteed wages, is that o f so-called pay-as-you-go.
In contrast to the anticyclical reserve plan, in any
given year the costs o f guaranteed wages would be
approximately balanced by current charges
against sales or business gross income. Such a
plan would involve relatively small payments in
the boom years and therefore relatively small
costs. In depression years, however, the pay­
ments would be large and the redistribution o f
current income would be considerable. The ques­
tion to which we wish the answer is how much the
payment o f currently financed guaranteed wages
might so redistribute income as to raise the level o f
consumption expenditures (or in more technical
language the consumption function) and thus in­
crease total aggregate outlay beyond what it other­
n See below, footnote 2 6, p. 445.


wise would have been in the depression period.
How would the cost be distributed between busi­
ness net savings, wages, and consumer prices ?
Except for the earlier discussion o f any possible
induced increases in productivity, pay-as-you-go
financing necessarily involves a process o f redis­
tribution o f income between the various claimants
to the national income—a redistribution which
would fall mainly in the depression phase when
large guaranteed wage payments would be made.
How such a redistribution affects aggregate de­
mand is one o f the most difficult questions in the
whole field o f economic analysis. A t the present
time, there does not exist sufficient theoretical and
factual knowledge to permit a confident or pre­
cise answer. It involves the same perplexing
problem as that o f the incidence o f the taxes raised
to finance our whole social security program ; or
for that matter, o f the incidence o f corporate and
business taxes in general.
As we have already noted, we assume that any
increase in productivity induced by the guaran­
teed wage has already had its effect in total real
income. The problem to which we address our­
selves, therefore, is the redistribution effect o f the
guaranteed wage. Three extreme positions can be
stated, with the truth probably lying somewhere
in between: (1) The cost o f guaranteed wages is
borne completely by profit-receivers through re­
duced earnings o f their properties; (2) the cost
is shifted forward completely to consumers; (3)
the cost is shifted back onto workers, who lose in
wage rates what they gain in steadier income.
A survey o f the literature on social security tax­
ation would show widespread doubt that most o f
the increase in pay-roll costs could, except in the
shortest run, be at the expense o f corporate profits.
Economists who have written on this subject seem
rather to incline to the belief that the primary in­
cidence would be on wages or on consumer goods
prices. W e would be rash to attempt a pro­
nouncement on this difficult quantitative question,
since not even the two o f us would be in perfect
agreement as to our rough guesses.
In depression when profits are already low or
negative, the heavy extra costs o f guaranteed
wages are perhaps even less likely to fall in large
part on capital. This conclusion is reinforced


when we remember that guaranteed wages are to
be superimposed on a system o f developed collec­
tive bargaining, where already labor is attempting
to keep wages high and is already taking some
advantage o f management’s ability to pay.
But let us first, fo r the sake o f the argument,
suppose that the cost o f guaranteed wages does
fall largely on profits. Then wage income w ill
be larger, and dividends smaller. Since the bulk
o f dividends does not go to poor widows and
orphans, there w ill probably be some favorable
effect upon the propensity to consume. But the
extent o f this should not be exaggerated. The
difference between the average propensity to con­
sume 22 (and to save) o f the rich and poor is known
to be very great. But the available evidence from
governmental fam ily budget studies seems to sug­
gest that the marginal propensities to consume
(and save)—and it is only these which are rele­
vant— differ less sharply between rich and poor
than do the average propensities. Dollars redis­
tributed from wealthier common stockholders to
workers add something to total consumption pur­
chases, but less than is usually supposed. Never­
theless, to the extent that such a transfer is feasible
consumption is thereby increased.
Not all corporate profits are paid out in
dividends. Some go to that other silent partner o f
business enterprise, the government. Con­
ceivably a shift from profits to wages might lower
tax revenue and, other things being equal, con­
tribute to larger depression loan financing and so
to a slightly higher level o f over-all expenditure;
in other words to a slightly higher level o f effec­
tive demand. It should, however, not be hard to
find other more obvious ways o f expansion if de­
pression and unemployment call for expansionary
fiscal policies.
A considerable part o f profits goes into net cor­
porate saving, representing undistributed profits
or additions to earned surplus. Part o f the in­
crease in guaranteed pay rolls might be expected
to come out o f such net corporate saving. (This
is true even in deep depression, when net corporate
saving may be negative if dividends are being paid
out in excess o f current earnings; because o f
guaranteed wages the figure might become
22 “ Average propensity” refers to the proportion of income con­
sumed (and saved). “ M arginal propensity” refers to the propor­
tion of any sm all additional increment of income which is con­
sumed (and saved).

algebraically more negative.) A n increase in
the payment o f wages at the expense o f corporate
net saving would, taken by itself, tend to raise the
level o f total effective demand. But this con­
clusion would be true only on the assumption that
there would not at the same time be adverse effects
upon the corporation’s inducement to invest.
In time o f deep depression, most firms do not
even replace much o f their depreciating equip­
ment. Yet they still, on their income statements,
include charges to depreciation reserves as an item
o f cost to be subtracted from gross earnings in ar­
riving at net profit. But these depreciation
charges are expenses that, at the moment, involve
no outlay. It would therefore be wrong to con­
clude that a firm which was suffering business
losses was necessarily flooding the community with
purchasing power. A more meaningful measure
o f a firm’s expansionary or contractionist in­
fluence, taking all factors into account, would be
the difference between its gross investment ex­
penditures (including replacement outlays) and
its gross saving (including depreciation); or, what
comes to the same thing, the difference between
its net investment and its net saving.
W ith net and gross investment already cut to
the bone, in a period o f depression a further re­
duction in earnings (and net saving) might not
have any very significant effect upon net invest­
ment. But in the first years o f recovery from a
depression, or during the first years o f descent
into depression, there might be some counter­
balancing adverse effects upon investment—al­
though not necessarily dollar for dollar. These
adverse effects might arise ex post simply because
in an imperfect capital market many firms must
depend upon their own funds for their investment
Probably more important would be the effects
on expectations aroused—the adverse effects upon
investment decisions at all phases o f the cycle.
During the boom, businessmen will be somewhat
wary o f undertaking certain doubtful marginal
investments if they expect to be unable to cut their
pay roll when times become bad. The harmful
total effects upon the average level o f net invest­
ment over the whole business cycle could conceiv­
ably be greater than the quantitative reduction in
net business saving. Or less. No one can say.

W e may sum up the case usually considered most
conducive to an expansionary effect o f guaranteed
wages—where the costs fall completely on p rof­
its—by saying that stimulus to the level o f pur­
chasing power and effective demand is o f somewhat
doubtful quantitative magnitude over the business
cycle as a whole. In depression times, the quan­
titative effects may be somewhat more important,
but still should not be exaggerated.
Let us turn now, more briefly, to the more
realistic case where a considerable part o f the cost
o f guaranteed wages is assumed to fall on wages
or upon the consumer’s real income. I f only
seasonal or short rhythms o f particular industries
are being considered against the background o f a
full-employment society, such a method o f meeting
the costs may lead to a more nearly optimal system
o f pricing and use o f economic resources. But
from the standpoint o f business cycle fluctuations,
such a method o f bearing the costs o f guaranteed
wages is fairly neutral in its over-all effects upon
production and (real) effective demand.
I f the cost falls upon wages or raises consumer
goods prices, then income is being shared by those
who are employed with those workers who would
be without pay if it were not for the guaranteed
wage. I f such benefited workers are not already
in high-paid industries and do not already have
high current incomes (apart from the guaranteed
wage) this whole process may involve some re­
distribution o f income from average income re­
ceivers to those who are more needy. Just as with
schemes for sharing work through reduced hours,
this redistribution might result in some slight in­
crease in the propensity to consume for the com­
munity as a whole. However, the point made
earlier concerning the smaller difference between
marginal propensities o f different income classes
would apply here with even greater force—since
the difference between incomes is in this case
relatively small.
The guaranteed wage would amount, in these
circumstances, to a sharing o f the income between
those productively employed and those unem­
ployed. In other words, those who are earning
incomes at productive employment would be de­
fraying the cost o f the guaranteed wages. This is
all the more true in view o f the fact that under
depressed conditions, profits could cover no appre­


ciable part o f the cost. Thus, the guaranteed
wage, under these circumstances, would in fact be
a “ share-the-income” program. In place o f a
“ share-the-work” plan, we would have a “ sharethe-income” plan. There would occur a shift o f
income among the wage-earner and consumer
groups with no sizable effect upon the aggregate
propensity to consume.
W e may conclude, therefore, that a pay-as-yougo financing o f guaranteed wages which does not
fall on profits would result in little change in the
level o f income determination at the different
phases o f the business cycle. W ith real investment
fluctuating over the cycle, real total consumption
(all groups in the economy considered) would not
remain stable, and real income would still fluctu­
ate more than the absolute variation in net invest­
ment. Only to the extent that the cost can be
saddled on to corporate profits, and more specifi­
cally upon corporate saving and not upon invest­
ment, w ill the guaranteed wage plans have any
appreciable expansionary effect upon the level o f
over-all production and employment.
This does not quite exhaust the analysis o f guar­
anteed wage financing on the total level o f effective
demand. As yet no mention has been made o f the
possibility that the enhanced security engendered
by guarantee plans might cause workers to save
less over the cycle, and to purchase with their sav­
ings more durable goods such as autos and houses.
This is a possibility, and to the extent that it is
effective, it would work toward some strengthening
o f the average level o f effective demand.
Can a similar case be made out for the proposi­
tion that the guarantee device w ill cause employers
to cast about fo r new productive activities and
thereby raise the average level o f employment?
As fa r as a single concern is concerned, there may
be something in this. I f a locomotive or other
capital-goods producer were to take on a consumers-goods line, such as breakfast food, he would no
doubt smooth out the variation o f his employment
and production. But fo r the economy as a whole,
little or nothing has been gained. The average
income elasticity o f demand and the over-all fluc­
tuations in income are the same as before. Simi­
larly, i f an auto company, to make work fo r its
own employees, cancels subcontracts with sup­
pliers and begins to make its own parts, there is
no over-all gain. I f the beer industry, by heavy


advertising, gains at the expense o f the bakery or
confectionery trade, the over-all situation is the
same. Only too often, the devices which seem to
stabilize one concern’s production are at the cost
o f somebody else’s destabilization.
The only true exceptions, from a business cycle
point o f view, are policies which involve additional
net investment fo r the community as a whole, or
an expansion o f consumption standards. “ P ro­
ducing fo r stock” is one stabilization device fre­
quently mentioned by writers on guaranteed
wages. Such a policy does involve net investment.
How important can this factor be over the busi­
ness cycle? The answer is somewhat discourag­
ing, except fo r brief cycles. Production fo r stock
might in 1930 have kept employment from slip­
ping off as rapidly as it did. But such positive
net investment in inventories is only too likely to
result subsequently in commensurate disinvest­
ment, making 1932 and 1933 even more depressed.
A brief recession in business believed to be tempo­
rary might be bridged by this device. But a sharp
inventory recession o f the 1921 or 1938 type is
likely to be accompanied by so much price un­
certainty as to render this device relatively
W e must also not lose sight o f the fact that many
o f the policies o f businessmen that lead to larger
total investment and employment do not give rise
to much employment within their own plants.
When railroads order new equipment, the extra
jobs are not provided fo r railway labor. When a
merchant or manufacturer “buys for stock” the
task o f guaranteeing jobs is eased for his suppliers
but not fo r himself. It is true that he is some­
body else’s supplier, and that if all together pursue
expansionist policies, all together may benefit.
But it is not less true that anyone who holds back
w ill also benefit from the expansion o f the others;
and it is somewhat Utopian to rely upon collusive
decision-making by business as a body or upon
altruistic social planning by isolated businesses.
The figures o f seven-eighths consumption and
one-eighth saving are given by way o f illustration.
They should not be interpreted literally, especially
since in many downswings o f the business cycle,
autonomous net investment (caused by advances
in technique and the like) w ill not disappear com­
pletely. Less than one-eighth o f the full em­
ployment income level would then have to be made

up by guaranteed wage programs in order to keep
total consumption stable.
There is also the further possibility that some
appreciable part o f net investment expenditure
is not “ autonomous” but is “ induced” by, or is de­
pendent on, the level o f consumption or income.
According to this type o f argument, if guaranteed
wage plans succeeded in keeping consumption at
a higher level, then an appreciable amount o f net
investment would be induced (over what there
would otherwise have been).28
The weakness in this argument stems from the
fact that a given stationary level o f national in­
come, no matter how high it is, cannot on balance
be supposed to include any continuing net—as
distinct from gross or replacement—investment.
It is only the change in the level o f income that
induces net investment. When the stock o f capi­
tal has become adjusted to any new level o f in­
come, no matter how high, net investment would
again disappear 2
*4—in the absence o f technological
changes and interest rate variations.
These rather long-run considerations w ill not
seem decisive to the adherent o f guaranteed wages
as a business cycle cure. He w ill ask, “ Isn’t the
business cycle a short-run phenomenon? W ould
not the maintenance o f consumption lead to in­
duced investment (over what it would otherwise
have been) for at least the few years that a depres­
sion usually lasts?”
The answer to both o f these questions may well
be in the affirmative. But this does not mean that
the temporary, once-and-for-all, induced invest­
ment effects o f consumption maintenance can be
regarded as raising the average level o f demand
and employment over the whole cycle. W hat is
28 In technical terms, some economists would assume a "m argi­
nal propensity to invest” (out o f income) as well as a marginal
propensity to consume. T his would tend to increase the "m u lti­
plier” effects of a given increase or decline (as the case may be)
in autonomous investment or autonomous consumption. But so
long as the two marginal propensities add up to less than one, then
guaranteed wage plans will incur some over-all losses (payments
for idle labor) whenever autonomous investment declines. How­
ever, those writers who assume large marginal propensities to
invest and large multipliers, seem to imply that the historical
changes in autonomous investment (the "m ultiplicands” ) were
correspondingly smaller— in order to lead to the same observed
fluctuations in total national incomes. Therefore, to such writers
the "losses” resulting from guaranteed wage plans would tend to
be correspondingly smaller.
24 This situation means that there are no changes in technology
involving new processes o f production or new products for con­
sumption. Changes in methods of production or in products
would often require new autonomous investment, which would
cause a rise in national income.

gained in investment during the depression is
likely to be at the expense o f investment during
subsequent periods. By virtue o f induced invest­
ment effects, guaranteed wage plans may have some
stabilizing effects on the cycle—by expanding de­
pression demand at the expense o f the follow ing
boom-time demand. In this it resembles reserve
financing, which we are about to discuss, with the
difference that reserve financing usually fills in
the trough o f depression at the expense o f the
previous rather than the subsequent peak. But
neither method is likely to expand demand appre­
ciably over the cycle, unless Government loan
financing or private corporation net savings are
used to finance the guaranteed wage plans. More­
over, as we have seen, any favorable induced
investment effects must be set against the unfavor­
able effects upon net investment and venture cap­
ital resulting from the recognition by potential
risk-takers that guaranteed wage plans are likely
to increase their costs and risks.
One final point favorable to the guaranteed
wage. Over time, the consumption standards o f
people increase as people get used to higher levels
o f living. Any success achieved in maintaining
high real incomes tends to breed further success.
Unlike induced investment effects, “induced con­
sumption” effects may be permanent rather than
transient or once-and-for-all.
Once employment is guaranteed, labor becomes
in the nature o f an overhead cost rather than a
variable cost. W e should at least explore the pos­
sibility that this might lead to a pricing policy
over the cycle which would make for greater sta­
bility o f production. The beginner in economic
theory is taught that really fixed costs should, at
least in the short-run, be disregarded in output
decisions and price form ation; any business should
not be refused which can at least earn something
more than variable costs. I f a large part o f labor
is no longer a variable cost, this might permit
downward flexibility o f prices to rather low levels.
In more advanced courses in economic theory
(particularly those dealing with so-called “ ad­
ministered” prices and monopolistic competition)
we are taught that “ fu ll” costs (including both
overhead and variable costs) actually have an im­
portant influence on price form ation, and this more
sophisticated analysis appears to be in line with
business practice and business opinion. In all like­


lihood, this pattern o f “ full-cost pricing” tends
to characterize those semi-monopoly fields where
industry is likely to guarantee wages. Therefore,
it is something o f an academic exercise to inves­
tigate the effect o f flexible downward prices which
abstractly might be related to the conversion o f
labor costs from a variable to a fixed cost.
Twenty years ago most economists would prob­
ably have considered such downward price flex­
ibility a highly effective way of meeting depres­
sion. Today we are not so sure. The modern
economy (given our present-day institutions) does
not seem to go through price deflation painlessly or
easily. Still there is this to be said for the kind
o f downward price flexibility referred to above in
connection with the guaranted wage. Such price
reductions would not, it is assumed, be accompa­
nied by wage reductions or any substantial decline
in worker income, so that one o f the worst aspects
o f a deflationary spiral would not be present.
Still, increasingly it is the modern viewpoint that
the price elasticity o f demand is much lower in de­
pression periods than used to be thought the case.
Consequently, we should think it unwise to at­
tach too great quantitative importance to the
phenomenon under discussion even if it were like­
ly—which it is not—that prices w ill show the
proper cyclical flexibility rather than perverse
W e must now analyze the possible effects o f re­
serve financing. This method has most signifi­
cance, and is most likely to be resorted to, in a so­
ciety subject to pronounced cyclical swings. I f, on
the contrary, employment is reasonably stable,
whether at a high level with low unemployment
or at a relatively unsatisfactory level with chronic
unemployment, one year is very much like another,
so that there can be little shifting o f the financial
burden over time.
A gradual and experimental introduction and
extension o f the guaranted wage plan might be
financed in part on a self-liquidating basis. A
gradual expansion o f the program as experience
justified might be accompanied by cost reductions
which could “ carry” the reserve plan without re­
sort to higher prices or wages lower than could
otherwise be paid. On this basis, it is likely, how­
ever, that progress toward the guaranteed wage


would be slow and would probably be largely re­
stricted to firms whose employment experience is
in any event favorable. I f anything substantial
were going to be achieved, it is probable that there
could be no escape from a program involving, for
the great m ajority o f firms, the accumulation o f
reserves financed out o f profits, wages, or higher
prices. W ithout substantial reserves, the program
would be discredited by a wave o f defaults at
the first onslaught o f any considerable volume o f
mass unemployment.
An examination o f the experience o f various
firms in the 1929-34 depression reveals how costly
different guaranteed wage plans might have been.
The high employment commitments o f the late
1920’s would have entailed heavy cost outlays all
through the early and middle 1930’s. I f guaran­
teed wages had then been in existence, in a real
economic and accounting sense, the men necessary
to produce the high 1929 outputs would frequently
have cost the companies in the thirties more than
the total wages actually paid out to them at that
time. Prudent bookkeeping would have sug­
gested that this expense be recognized in 1929 as
part o f the cost o f that year’s output, and that
funds be set aside to meet this contingent, but
nonetheless necessary, deferred expense.
Accordingly, if we mean by a guaranteed wage
program something more than a cautious and
tentative introduction by a few firms with highly
favorable employment experience, we must en­
visage a substantial program o f financing—in
other words, the accumulation o f large guaranteed
wage reserve funds. Now it is just this problem
which we need to face in assessing the feasibility
o f the guaranteed wage plan, unsupported by
governmental financial assistance. How would
the accumulation o f large guaranteed wage re­
serves affect the functioning o f the economy?
An analysis o f the impact o f the guaranteed
wage system (financed on the reserve basis) upon
the flow o f income and expenditure involves a con­
sideration o f the manner in which such a program
withdraws funds from the income stream on the
one hand, and pours funds into the income stream
on the other. I f we envisage a highly fluctuat­
ing society, and if we concentrate attention for
the moment exclusively on cyclical unemployment,
it follow s that a guaranteed wage reserve plan
w ill, for the economy as a whole, withdraw funds

from the income stream in boom years, and pour
back approximately equivalent funds in the de­
pression years. The same problem o f “ incidence”
o f the costs arises here as under pay-as-you-go;
but the tim ing is different.
I f we assume that the annual charges to the
reserves are financed largely from higher consum­
er prices or lower wages, it follow s that the level
o f consumer expenditure would be less than other­
wise in the boom years, and higher than otherwise
in the depression years. The “ reserve method”
lops off the boom and fills in the valley o f depres­
sion. It is a method o f redistributing expendi­
tures over the time span o f the cycle. The reduc­
tion o f expenditures in the boom period might re­
duce employment, or it might merely have the
effect o f holding down price inflation.
In technical terms, the accumulation o f reserves
during prosperous periods tends to exert a de­
flationist influence at that time by reducing the
effective propensity to consume and increasing
“ average thriftiness” or the effective propensity
to save. The spending o f the reserves in the de­
pression period exercises an expansionist effect by
raising the effective propensity to consume at that
Taken as a package, this double-barreled pro­
gram is socially desirable. But i f the period o f
so-called prosperity is like that o f 1936 or 1937,
in other words not one near to fu ll employment,
the deflationary influence o f reserve accumulation
is, taken by itself, a factor reducing employment,
consumption, and in all likelihood capital form a­
tion as well. However, if the prosperity period
is one characterized by manpower shortages, by
too much effective demand, and a tendency toward
inflation, then the enforced reduction o f consump­
tion is all to the good.
W e need not treat in detail the mechanics o f
the process whereby reserves are accumulated and
dispersed, because this problem has been widely
discussed in the literature on social security. I f
guaranteed wage reserves consisted simply o f
building up o f cash or bank deposits in good times
and their dispersal in bad times, the process would
be relatively simple. The quantity o f money
would not necessarily have to undergo any changes
but its rate o f activity or velocity would be lessened
in good times and increased in bad.

I f reserves are treated as trust funds investable
only in Government bonds or similar gilt-edge se­
curities, the mechanics might be slightly different
but the final effect substantially the same. As a
matter o f fact so long as the Federal Reserve
banks or the commercial banks are w illing to buy
or sell considerable volumes o f Government se­
curities, these assets possess many o f the liquidity
properties o f money. I f, in depression, the bonds
accumulated in the reserve funds were bought by
the banks, then the stimulus to effective demand
resulting from guaranteed wage disbursals might
appear as an increase in total bank deposits rather
than simply as a change in the velocity o f money.
In good times, if the growing reserve funds ab­
sorbed Government bonds held by the banks, the
result would be to curtail the volume o f deposits
during the boom below what it would otherwise be.
Any thoroughgoing discussion o f this problem
would have to take account o f the effects upon the
interest rate structure o f both the accumulation
and deaccumulation o f such reserve funds.
Broadly speaking, these secondary reactions upon
the interest rate structure and the capital markets
are to some degree perverse. The accumulation
o f reserves in good times would to some measure
tend to raise capital availability and lower interest
rates, so that some o f the enforced reductions in
consumption would seep over into investment
rather than curtailing over-all demand.25 Sim il­
arly in depression, attempts to liquidate reserve
funds might have some upward effects upon in­
terest rates and consequently, some depressant
effects upon investment. However, these second­
ary effects can be minimized if reserve funds are
confined to Government bonds. Moreover, the
25 So long as the funds are not hoarded, there is always the
possibility that some o f the purchasing power diverted away from
consumption will filter into investment.
(It has been argued
along similar lines that raising taxes in excess of Government
expenditure to retire debt may prove not to be deflationary if the
owners of retired Government bonds plough the money back into
productive investment expenditure.)
In a perfect capital market,
where the favorable effects upon investment can only take place
through a reduction in the interest rate, this secondary reaction
to a primary reduction in the consumption schedule would in all
likelihood be quantitatively smaller, dollar for dollar, than the
original primary effect. T his for two reasons: the doubtful
responsiveness of investment to reduced rates of interest, and the
adverse effect on investment outlay of reduced consumption sales.
To the degree that the actual capital market is an imperfect one,
always subject to informal rationing, investment may react some*
w hat stronger to larger loanable funds than if the investment rate
alone were involved. T his modifies but hardly alters our con­


monetary authorities can easily, and should, take
account o f any perverse interest and other effects
o f reserve accumulation and deaccumulation and
take appropriate action.
A new possibility would arise if governmental
fiscal policy could be assumed in the years ahead
to be effective in preventing inflation when the
economic system is operating at full employment.
Whenever private investment demand was exces­
sive, fiscal and monetary policy, on this assump­
tion, would curtail the excess. In such an environ­
ment, the widespread accumulation o f guaranteed
wage reserves would reduce to some degree the
need fo r alternative deflationary monetary and
fiscal policies. I f carried to excess, however, such
reserve accumulations might have to be offset by
actual expansionist governmental policies.
There is no assurance that the level o f income
and employment over the entire cycle would be
any larger under reserve financing. Among
other effects, the program would bring about a
redistribution o f income, partly from profits,
partly from consumers in general, and partly from
productively employed workers to workers who,
if there were no guaranteed wage plan, would
cease to draw wages. I f carried out on a relatively
modest scale—one which would not seriously dis­
tort price-wage relationships—the effect would
be to level off more or less the boom demand and
to raise the effective demand in the depression
period. But if really huge reserves were accumu­
lated in boom years, adequate to pay annual wages
to a large part o f the labor force in a depression as
serious as that beginning in 1929, the boom could
easily be converted into a depression. Reserves
o f the magnitude required would cause a serious
distortion in the economy. Some would prefer to
state this distortion in terms o f the wage-price
structure, others in terms o f a concealed tax on
consumers and wage-earners, and still others in
terms o f a savings-investment problem.28*

Apart from these theoretical considerations is
the practical matter that actuarial calculations o f
the unemployment risk are not feasible. The
reserves that are built up might prove too large.
In this event the accumulation o f reserves would
amount to a compulsory savings scheme not simply
in the boom years, but also over the entire cycle.
Aggregate demand might thus tend to become
deficient over the long run and create a condition
o f underemployment. (O f course if the long-run
factors were inflationary, such compulsory saving
would tend to be a stabilizing factor.) Finally,
in a grow ing society, the setting aside o f reserves,
even though actuarially exact, nevertheless would
still result in the growth o f reserves over the cycle,
and to this extent, would tend to aggravate the
problem o f maintaining adequate levels o f aggre­
gate demand.
On the other side, the inability to make reason­
ably accurate actuarial calculations o f the risk in­
volved might result in wholly inadequate reserves.
Unemployment insurance reserve funds, though
they undertake a very limited liability compared
with a comprehensive guaranteed wage program,
have had to be supported in various countries by
the Government treasuries. W hile large reserves
have been built up in the State unemployment
funds in the United States, a serious and prolonged
depression could easily bankrupt many o f them.
A guaranteed wage plan, even one limited to 40
weeks per year, could be considerably more costly
than unemployment insurance. The reserve
funds, to withstand a serious depression, might
have to be far larger than those needed for unem­
ployment insurance. Put to the test, guaranteed
wage plans might need Government support even
more than unemployment insurance. Thus, what
was intended to be a scheme based on private
industry financing might face default under the
stress o f serious depression, or else be compelled
to call upon Government support. This risk

* I f technological cost savings from the guaranteed wage plan
(assuming for the moment that such plans do increase man-hour
productivity) were placed in a reserve fund during the boom
phase of the cycle and paid out in the depression phase, the effect
would be a redistribution o f income over time. The total income
payments made to individuals in the boom would be made less
than would otherwise have been the case ; and during the de­
pression the income payments would be increased. Financed as
here assumed, out o f increased productivity, there would result no
redistribution o f income between individuals, and no absolute re­
duction in corporate profits or corporate net savings. I f how­
ever, the gains in productivity were nil or inadequate to cover
the guaranteed wage payments, the added costs would have to

come either out of corporate net savings or else from a redistri­
bution of the income of individuals.
Only the reserve method o f financing is capable of redistribut­
ing the income over time, i. e., from boom to depression. Such
redistribution over time has nothing to do per se with the ques­
tion where the funds come from , whether fr o m : (a ) gains in
productivity or (b) redistribution of income between individuals
and social groups. I f the reserve method of financing is not
used, gains from productivity will necessarily be passed on in the
form of (a ) larger income payments, (b) increased outlays on
plant and equipment, or (c) larger corporate retained earnings.
But none of these, apart from reserve financing, would tend
to iron out the cycle.


serves to stress all the more the importance o f
lim iting the employer’s liability, as suggested in
chapter V I below.
It would not be possible to calculate with any
high degree o f accuracy the actuarial risks involved
in introducing guaranteed wage plans in different
industries even in a society committed to a program
o f sustained full employment, and prepared to use
fiscal, monetary and other measures to achieve this
goal. A number o f countries, including England,
Canada, and Australia, have issued white papers
on employment policy proclaiming high and stable
levels o f employment as a deliberate aim and
responsibility o f Government. The United States
Employment A ct o f 1946 does not go quite that
far. A ll the British countries referred to above
have recognized the difficulties involved, and none
is confident o f anything more than moderate suc­
cess. Thus, even with the best o f good w ill and
favorable circumstances, no one knows what
degree o f success may attend these plans. W e
know that the war has left us the heritage o f
innumerable distortions, and these w ill plague us
fo r many years to come.
Let us suppose, however, that we have surpassed
this difficulty—that experience has, in fact, demon­
strated a high degree o f success with a stabilized
full-employment program for a period sufficiently
long to warant general confidence. Some fluctua­
tions there would nevertheless be, but more moder­
ate and presumably fairly well under control.
Cyclical fluctuations o f employment would be
m ild, yet relatively large in the heavy capitalgoods industries. Seasonal and transitional un­
employment would also be experienced.
In the “ ideal” society described above (and we
repeat that we have no illusions that such a society
can quickly be realized) guaranteed wage plans,
privately financed, might tend to moderate any re­
maining cyclical swings, and to facilitate an at­
tack on seasonal unemployment. Transitional
and frictional unemployment might be intensified
if the guaranted wage had the effect o f reducing
labor mobility.
W ithin the framework o f the society envisaged
above, cyclical unemployment might become a
more or less manageable risk, and accordingly, the
reserve funds needed to meet the financial lia­

bility involved would not need to be large. In
this event there would develop no long-run prob­
lem o f excessive compulsory saving in the form
o f reserve funds. The reserves accumulated in
the good years would be dispersed in the rela­
tively low years. This leveling process would
tend to smooth any remaining swings in the cycle.
A buoyant labor market, such as that here as­
sumed, would moreover be favorable to an attack
on the problem o f seasonal unemployment. Em­
ployers would be stimulated by the introduction o f
the guaranteed wage to find year-round work fo r
their employees. I t is one thing to place such
a responsibility upon employers in a society
such as the one we are living in, with its grave
uncertainties with respect to the stability o f the
market and the adequacy o f aggregate demand.
It is quite a different matter to introduce the
guaranteed wage in seasonal industries in a society
in which, within reasonable limits, the adequacy
o f aggregate demand is assured. The develop­
ment o f supplementary lines is feasible in an ex­
panding and buoyant society, whereas it might
only supplant the product o f some other producer
in a limited market in which there was not work
enough to go around. Seasonal unemployment
might be largely eliminated in a full-employment
economy. But even so, this important goal could
not be reached unless ingenuity and resourceful­
ness were brought to bear on the problem. The
guaranteed wage might offer a powerful financial
inducement to employers to find steady year-round
work fo r their employees. The technical job o f
dovetailing short-run fluctuations in employment
is no mean managerial task, but a sustained high
level o f aggregate demand would provide an en­
vironment within which the job could be attacked
with high promise o f success.
W e have spelled out these various prospects
o f the guaranteed-wage program within the frame­
work o f a society which had achieved a high and
stable level o f aggregate demand, not because we
think such a society is going to be reached tomor­
row or the next day, but rather to lay bare the
difficulties confronting the guaranteed-wage pro­
gram. The conclusion is not that the guaranteed
wage must await the dawn o f a perfect society.
The conclusion is rather that we must take account


o f its limitations, and especially avoid procedures
that may defeat the very purposes which it is
intended to achieve.
Having in this chapter analyzed the effects
o f guaranteed wages upon the problem o f busi­
ness-cycle unemployment, we turn in the next

The problems to be discussed in this chapter
are o f a rather abstract and general nature.
Nevertheless, the theoretical analysis involved,
even though briefly stated in this report, is, we
believe, important in an over-all consideration o f
the guaranteed wage.
In chapter I I it was shown that the economic
cost o f idleness to the community could be pri­
marily measured by the loss o f output which it
entails.27 Suppose that a particular industry or
line o f activity has a record o f great instability o f
production and employment. How should its
prices and costs then be set?
This identical question was involved in the ex­
tensive discussion o f merit (or experience) rat­
ing in connection with unemployment compensa­
tion. The original Wisconsin Unemployment
Insurance A ct, drawn up under the strong in­
fluence o f John R. Commons and economists o f
his school, required employers with unusually poor
records o f stability to pay higher rates o f taxa­
tion. Those demonstrating unusually good con­
tinuity o f employment were granted lower rates—
in much the same way that steel-frame buildings,
relatively immune to fire risk, are granted low fireinsurance rates.
Two principal considerations are usually in­
voked to justify this procedure. First, and per­
haps o f least importance, is a feeling that fairness
(justice or equity) implies that an employer
should have to pay only for the evil which he
creates, but that he should be made to pay for
that. This particular argument is a highly con­
troversial one. Numerous writers, perhaps even
the m ajority, have dissented, arguing that it is the
essence o f social insurance (in contrast to private
” Our earlier discussion also dealt w ith the additional evil
arising out of the effect o f idleness itself on the worker and com*
munity, and also upon the problem o f equitably sharing the costs
involved in idleness between different individuals and groups.


chapter to a consideration o f its influence upon
the pricing system as it relates to the efficient use
o f economic resources. Even if the problem o f
depression were brought under control there would
still remain the challenge o f seasonal and other
irregularities in production.

insurance) that there be a sharing o f burdens be­
tween groups; the essence o f merit rating, on the
other hand, is the perverse principle o f “ to him
that hath, shall be given.”
The second argument in favor o f making the
industry bear the costs o f its own instability has
usually been the more important one. Under such
a system, management is supposed to be encour­
aged to stabilize its operations. It is financially
penalized if it does not stabilize; it is rewarded to
the extent that it does. There is certainly some­
thing to this; as we saw in our earlier discussion
o f the present wage contract, labor appears to each
firm as an avoidable variable cost. Current prac­
tices therefore tend to warp and distort the socially
desirable adjustments o f production.
W e do not wish to enter upon the details o f this
controversy. It is enough to note that the oppo­
nents o f merit rating point to empirical data to
show that employers are typically not able to do
much about their own instability. Experience, it
is said, seems to indicate that employers’ reactions
to higher penalty rates are not sufficiently sensitive
(particularly in response to the rather moderate
differences in rates usually involved in merit rat­
ing) to be very significant. Further, it is argued
that employers with steady records are not usually
better planners but are more often the lucky bene­
ficiaries o f special market situations (often o f a
monopoly typ e).
This economic controversy finally burned down
in the years after 1935 when the Social Security
A ct was passed. The theoretical honors, if one
may judge from the literature, seem to have gone
against merit rating. Nevertheless, in recent
years merit rating has been introduced in modified
form by almost all States, principally as a one­
way street making fo r reductions in taxation and
tending to keep unemployment reserves from
growing so rapidly during the high-employment
wartime years—that is, during precisely the time
when such reserve accumulation might contribute

toward the fight against inflation and excess aggre­
gate demand. This, and not the establishment o f
effective differentials spurring planning for sta­
bilization, has become the primary function o f
merit rating.
When we turn to guaranteed wages, which is
equivalent almost to 100-percent unemployment
compensation borne completely by employers,
what was previously a rather stale academic exer­
cise becomes a really vital economic problem.
Should the form o f the wage contract be changed
so as to raise, substantially, the costs o f production
o f unstable firms?
A quite different answer must be given to this
question depending upon the kind o f instability
involved. W e saw, in the last chapter and earlier,
that a typical business concern cannot really do
very much by itself to moderate the cycle, and
often what it can do represents no corresponding
net gain for society as a whole but rather only
changes the place where instability appears. W e
also saw that widespread guaranteed wages by all
employers together are scarcely likely, taken alone,
to prove a quantitatively important stabilizing
factor in an economy subject to wide swings o f
investment, which in turn have a cumulative effect
on income and employment.
The John R. Commons view that the price o f
each commodity should be made to bear the cost
o f the idleness which it involves—we do not say
causes—cannot validly, we believe, be applied to
unemployment o f the business cycle type. In this
chapter, we wish to consider whether or not a
similar conclusion would hold with respect to un­
stable industries which operate in a continuing
high employment economy; or to unstable indus­
tries which operate in an economy whose general
over-all activity is steady but at a relatively low
level involving considerable chronic unemploy­
A t the risk of being wearisome, let us repeat once
more why the problem o f business cycle unemploy­
ment differs from that o f seasonal or other ir­
regular rhythms. The unstable sector o f our econ­
omy is predominantly the capital goods industries.
To argue that costs and prices should be raised
in such industries flies in the face o f certain com­

monly accepted programs for fighting depression—
programs which stress the need to reduce construc­
tion costs, interest rates, and capital costs in gen­
eral so as to stimulate investment outlays. It
would be bad social accounting to discourage em­
ployment in the capital goods industries by sad­
dling additional costs on these industries. Such a
procedure is only too likely to reduce the total vol­
ume o f capital goods outlays over the cycle, thereby
leaving the system at a lower average level over
the entire cycle.
The same matter may be put in still another
way. When unemployment is the alternative to an
industry’s employment o f a worker, the true social
(opportunity) cost o f hiring the worker is nil. Let
us suppose that we undertake to saddle—in the
form o f an overhead—the financial cost o f an idle
worker upon the industry in question. I f indeed,
it were true that the capital goods industry were
characterized by a high degree of perfect competi­
tion, in the short-run these increased overhead
items would not cause any increase in the selling
price o f the product (a capital good) since under
perfect competition the selling price would be
forced, in periods o f falling demand, down to a
level below full unit costs. This means that sad­
dling the extra labor cost (in the form o f an over­
head item) need not necessarily result in curtail­
ment o f output. Instead, it would cause the shortrun burden to fall heavily upon the industry’s
stockholders. This might well be better than hav­
ing it fall upon the workers, but is not necessarily
better than spreading the burden of depression
more widely on the community as a whole (assum­
ing for the moment that the Government does not
act to prevent depression).
The above result would hold only for a highly
competitive industry and then only for the short
run. In the longer run, firms would be forced out
o f the industry as a result o f chronic losses (in ­
cident to saddling the industry with extra labor
cost in the form o f a guaranteed wage overhead)
until enough firms had left to cause output to de­
crease and prices to rise to the level o f fu ll aver­
age cost (including overhead and taken over the
whole business cycle). But such increases o f the
price o f capital goods, as we have already seen,
tends to reduce total employment.
I f the industry is one characterized by consid­
erable imperfection and by administered prices


set by the firm, we might still have short-run
ruinous competition. But more likely the firms
w ill be aware o f their competitive interdependence
in pricing and o f their monopoly power to raise
prices without losing any considerable part o f
their customers. Full cost considerations are
likely to provide a powerful rallying ground for
the firms in the industry, so that, even in the short
run, prices might rise. In the long run, the same
result as already indicated would follow , although
we must also be prepared for the possibility that
so-called monopoly profits may be made to bear
part o f the cost.
In the absence o f effective Government fu ll em­
ployment measures,28 it would not be good policy
to permit the whole scale o f capacity and labor
force in the capital goods sector to shrink to a
point where the average price over the cycle would
cover fu ll costs including the guaranteed wage
overhead. This might only make the saving and
investment problem worse.
And yet, it is patently unfair to let workers
(attached to the capital goods trades and who have
no other place to go) receive lower earnings over
the cycle than other workers. One obvious solu­
tion would be to let the Government make up
the difference in relief payments or social insur­
ance, it being manifestly undesirable to permit
capital goods prices to rise over the cycle. How­
ever, if the policy o f Government aid is to be fo l­
lowed, it becomes rather obvious that the Govern­
ment might better get something for its money in
the way o f useful public projects. Thus we are
brought to a planned program o f public expendi­
tures to fight depression; or if the people demo­
cratically feel that high priority should be given
to private consumption activity, the logical policy
implication is Government transfer expenditure
(or tax reduction) which w ill increase private
consumption and thereby provide job opportuni­
ties outside o f the construction and capital goods
industries. And just as taxes should be raised
88 W e deliberately refrain from discussing the problem of letting
wages (and prices) fa ll in an attem pt to reduce the surplus sup­
ply of unemployed labor. Such a discussion would be highly
technical and would involve a volume by itself. Except for a
sm all fringe, the m ajority of writers dealing with this problem in
the la st decade are o f the opinion that cutting wages and prices
in a hyper-deflation spiral is either undesirable or unfeasible (or
both) in a modern capitalistic country. I t w ill be clear from
our emphasis that we believe that any alleged advantage o f such
a deflationary process could better be achieved by expansionary


during inflation and Government expenditure
carefully trimmed, so in lean times tax reduction
is in order, while useful governmental investment
and public services w ill need to be expanded.
But what if there is no effective fu ll employment
program and the economy operates at a steady
level with considerable unemployment? H ow
does the view that the prices o f unstable industries
should be made to bear the costs o f their instability
then stand up ?
It w ill be clear from the discussion above, that
the answer must be “ very poorly.” In effect we
are asked to place a sales tax on the capital goods
industries in order to keep up the income o f the
unemployed. This is very nearly the worst type
o f financing that anyone could devise.
When we deal with a world o f adequate aggre­
gate demand and generally high employment,
however, the John R. Commons reasoning comes
into its own. Then any industry with great
seasonal variability or with some other irregular
pattern w ill be withdrawing the labor it hires
from other productive employment.29
In a high employment economy any industry
that draws resources to itself and then uses them
only part o f a year ought properly to be charged
with the cost o f those resources. This industry’s
output must bear the responsibility o f causing re­
ductions in output elsewhere, equal in value to the
productive resources taken away from all other
Even if an industry is unable to stabilize its
operations, it should still be charged up with its
full costs, inclusive o f idleness created by it.
Otherwise too many resources w ill be going into
that industry, its price w ill be too low, and the con­
sumer o f the goods in question w ill be subsidized
at the expense o f the group least able to afford the
89 These remarks are not meant to apply to those seasonal in­
dustries which hire workers who come for limited periods Into
the labor market, from schools and from homes. Such industries
perform a highly useful function in providing short-period em­
ployment at ju st the season o f the year when there occurs a
temporary increase in the labor force.

burden—the workers subject to intermittent in­
come. Higher costs are more than a whip to the
em ployer; they are a device for contracting an
unstable line o f activity.
I f it is unavoidably necessary for a municipal
fireman or an auto worker to stand by in idleness
much o f the time, we must redefine our concept o f
productive labor to include such necessary “ ac­
tivity.” A t the same time we must tender to the
auto worker what we already concede to the fire­
man, adequate pay fo r all working time that he
is unable to perform elsewhere.
Undoubtedly the gradual carrying out o f a pro­
gram such as is implied in the above remarks would
result—gradually but surely—in some drastic
quantitative changes in the present pattern o f
prices and output. So much the better, i f it is
true that the present-day structure o f prices is
grossly distorted away from an efficient and equi­
table pattern o f resource use.
Some people may grant that an industry should
be charged with the fu ll cost o f the resources it
takes away from other industries, but still argue
that higher hourly wage rates rather than a longer
guaranteed tenure is the proper solution to the
problem. The statistical data referred to in chap­
ter I I suggest that there is no universal tendency
fo r hourly rates to rise so as to compensate fo r
variability o f employment. However, it is un­
doubtedly true that in some very seasonal lines,
hourly rates are very high; and variability o f work
is one reason offered by unions fo r even higher
hourly rates. Often such unions are opposed to
guaranteed wages, i f this is to mean lower hourly
rates or slower increases in future hourly rates.
In such situations, higher hourly rates may be
better than no adjustment to heavy seasonal unem­
ployment. But so long as steady work does not
involve extra disutility, the longer tenure provided
by guaranteed wages would be a more economically
efficient arrangement because then, and only then,
would there be an incentive toward regularization
o f employment, an incentive to put the available
worker to some sort o f useful work.
The only real economic drawback to guaranteed
wages in such a situation arises out o f the very
real possibility that the workers laid off by the
industry in question might possibly (had there
been no guaranteed wage) been able to find fill-in
productive employment elsewhere. Such possibili­

ties are no doubt lim ited, but to the extent that
they exist, it is not proper to regard the industry
in question as being responsible fo r totally with­
drawing labor from other useful w ork; it is there­
fore incorrect to saddle the industry with their fu ll
guaranteed wages. In fact, in such situations,
the guaranteed wage can have harmful effects on
the mobility o f labor. Our proposal o f chapter V I
with respect to “ integration” with the unemploy­
ment insurance system may remedy this in part.*®
T o the extent that the idle time o f the workers
hired by one industry can be dovetailed with the
operations o f another industry or with schooling
and leisure, we need not attribute to the industry
the fu ll cost o f its laid-off workers. Ideally, dove­
tailing o f activity is one solution to the irregular­
ity o f seasonal and other short rhythms o f different
industries. Hence it is essential that unions relax
their objections to changes in function and ac­
tivity o f workers.
Dovetailing is easier the larger the units, since
when many intermittent lines o f activity are
merged, the extremes o f their sums is much less
than the sum o f their separate extremes. Or to
put this in another way, by merging activities we
can cancel off the peaks o f some against the
troughs o f others. This would seem to provide
some argument in the direction o f large-scale mon­
opolies, necessarily possessed o f tremendous
amounts o f economic power. And so it does, i f
the dovetailing is to take place within the firm ;
i. e., if the work is to be brought to the worker
and not the worker to the work.
However, dovetailing tends to stabilize pri­
marily to the extent that the components dove­
tailed have different cyclical rhythms and phases;
in the ideal case o f the coal and ice dealer, the com­
ponents w ill have opposite phases so as to be
mutually canceling. Therefore, the firm which
wishes to stabilize its time-profile o f production
cannot do so simply by growing in scale or by add­
ing closely duplicating lines subject to the same
timing o f demand. It must branch out into new
territories, take on new and different lines. Con-8
80 W orkers in some lines of activity
employment. To the extent that they
o f leisure, they need not receive a full
collective bargaining in such cases w ill
guaranteed wage.

may prefer intermittent
value occasional periods
annual wage. No doubt
have other goals than a


sequently, the fact that it grows in size need not
entail a commensurate growth in its monopoly
power. Monopoly power depends prim arily upon
a firm’s relative importance in comparison with
the total demand for each o f its products. I f it
grows by branching out into new lines the firm
is also spreading itself over wider areas o f de­
mand. T o revert back to the coal and ice dealer,
there is no special reason to believe that his monop­
oly power in either o f the two markets is greater
that that o f two separate dealers each handling
one line. H is over-all efficiency may be greater;
but that is a good thing rather than a bad.31
I f we pursue the argument concerning the de­
sirability o f pooling the labor reserves o f many
lines o f activity in order to minimize unnecessary
idleness, we are confronted with the problem o f
the general labor market itself. W e can con­
ceive o f a vastly improved labor exchange to which
workers go fo r placement. In the fantastically
extreme case where each day every person and
every firm turn anew to the central labor exchange
for reassignment, idle labor reserves would be at
an absolute minimum, the whole being steadier
than its parts.
Common sense tells us that there are insurmount­
able objections to such a fantastic case. In any
factory this morning’s production w ill depend
upon yesterday’s activity in such a way that en­
tirely new men coming into the plant would be at
a great disadvantage, however good their general
experience and training. Moreover, even if the
inefficiency o f such an arrangement could be over­
come, we must still reckon with the intrinsic prop­
erties o f human nature; the worker would find it
profoundly distasteful and disorganizing to move
on to a new job at frequent intervals; man requires
continuity in his working as well as in his home
W e need not prolong the discussion o f what is
admittedly an extreme case. There is no reason
why a proposal to pool all workers together into
one organized market should not be perfectly com­
patible with job continuity for the great m ajority *
* Those who regard “ bigness” per se as an evil, without regard
to its market consequences, may still object to the firm’s growth.


o f workers, most turn-over being confined to the
“marginal” workers as is now the case. But this
discussion does high light the problem o f recon­
ciling job continuity for the individual with maxi­
mum national productivity.
Thus, if guaranteed wage plans were universally
adopted prior to any successful attack upon the
problems o f stabilizing production, the effect
might be to attach workers to a given firm when
there was no useful work fo r them to do there,
even though, at the same time, there was produc­
tive employment to be found elsewhere.32 Boon­
doggling is boondoggling, and bad economic policy
whether it is pursued by the Government or
by private enterprise. Boondoggling is particu­
larly costly during periods o f high employment
when productive employment opportunities are
This illustrates that it is as necessary in this
chapter, as in the last one dealing with aggregate
demand, to distinguish carefully between the d if­
ferent conditions o f economic life upon which
guaranteed wage plans impinge—between high
employment and depression economies. There is
a danger that guaranteed wage plans, not coupled
with effective stabilization planning, could immo­
bilize men in such a way as to increase labor hoard­
ing and the inefficient use o f resources.
Thus far we have been discussing the costs o f
unavoidable idleness. Even if employment were
not stabilized, guaranteeing steady wage income
might so improve labor productivity and turn­
over rates as to be, in effect, costless. This would
be all to the good. O f course, it would be better
still if in addition to making labor more produc­
tive while at work, it were also possible to find
useful continuous work to do.
Stabilization may, however, be costly at the out­
set. It takes effort and planning. Under the
present wage contract, which permits the layingoff o f workers on short notice, there may be little,
** Because o f the considerable difficulties and costs involved in
workers going from one job to another in order to utilize their
special skills, there is also much to be said for mobility on the
part o f the employer in shifting between production lines rather
than throwing the fu ll burden of mobility upon the workers.
T his in no sense means that we minimize the importance of labor
mobility between and within firms.

if any, counterbalancing savings o f cost from
steady operation.83
But under the more optimal system o f pricing
discussed in earlier sections, where each employer
is made to pay fu ll wages to all workers whom he
withdraws from productive employment else­
where, the costs o f stabilization w ill often be lower
than the costs o f not using the workers whose
pay goes on anyway. Accordingly, stabilization
plans, under this procedure, might be promoted.
Being available, such workers might as well be
used for whatever useful goods they could produce.
Under high employment, the ingenuity exercised
by an employer in financing odd jobs, or less than
fully productive tasks, for his men to do in off­
seasons is highly commendable.
The construction industry provides an illustra­
tive hypothetical case to show how guaranteed
wages might give rise to a different system o f
pricing, leading to a more efficient and equitable
use o f our national resources.84 Let us suppose
that a house requires, say, 2,000 man-hours o f labor
to build in the summertime and 4,000 in the win­
ter. I f labor can be hired and fired by the season
at the same hourly rates, say $2 per hour all year
around, no one would ever build in the winter,
because by waiting until the follow ing season,
the buyer could save 50 percent in labor cost.
Construction workers would be out o f jobs for, say,
6 months o f the year. Houses would be sold for
less than their true social cost, most o f the differ­
ence coming out o f the workers’ loss o f income.
Theoretically, it might be alleged that a way
out o f this situation would be for workers to ac­
cept half wages in the winter. But in view o f
union insistence on uniform ity, and if it were as­
sumed that similar workers on steady jobs else­
where receive around $1.50 per hour, we may re­
ject this suggestion as unrealistic.
88 One saving, mentioned earlier, results from the fact that less
plant and capital equipment are necessary when loads are spread
evenly over time. Against this saving in interest and deprecia­
tion (resulting from time rather than use) there is the fact that
in many industries the extra capacity serves as a stan dby; in
case of heavy sales, the busy season is lengthened. A plant op­
erating near to capacity all the time cannot expand its production
in this w ay, but m ust depend on overtime or more intensive
34 A s indicated in ch. V I, we do not think that any union should
be compelled to adopt guaranteed wages except through voluntary
collective bargaining. However, the present hypothetical case of
the construction industry throws some light on the economic de­
sirability of collective bargaining taking one form rather than

Under a system o f guaranteed wages the em­
ployer would realize that his summer contracts
really involved more than the wage rates paid
then. Moreover, during the winter his labor force
would cost him nothing extra if he kept it at work.
The result: He would produce houses all year
around, selling them in all seasons at about the
same price (based on the hourly wage times 3,000
man-hours, the average between winter and sum­
mer labor requirement). I f the old hourly wage
rate were retained, the labor cost o f a house at the
site would now be $6,000 summer and winter. This
increase in price results from the product bearing
its full economic costs.
However, if part o f the $2 hourly rate repre­
sented a premium to compensate for the winter
idleness, and if similar labor elsewhere received
only $1.50 for steady jobs, then the hourly rate
might now fall and workers would still be better
off than under the old regime with a winter lay-off.
Their annual take-home pay would be up by 50
percent. The labor cost (at the site) o f houses,
summer or winter, would now be about $4,500 (or
3,000 times $1.50), which is just where it should
85 Apart from the social desirability o f subsi­
dized low-cost housing, the price indicated would
draw the right amount o f resources into the build­
ing industry, and all o f such resources would be
efficiently used.
This is only a numerical example; it is meant to
be illustrative rather than to describe an actual
situation. Moreover, it assumes a condition o f
adequate aggregate demand and high over-all
employment so that the excess labor in the unstable,
seasonal industry could readily find jobs else­
where, once the industry were stabilized.
Often a system o f variable pricing may prove
to be economically optimal. Such a system would
mean high prices during peak demand seasons
when (m arginal) costs are high and output must
be rationed; and lower prices during off-peak
periods. In addition to price reduction, terms o f
sale and delivery may be made more agreeable in
off periods and less agreeable in peak periods.
Alternatively, a seller in peak seasons may offer
a reward in terms o f priority in delivery dates to
In a moment we shall consider the possibUity of seasonal
variations in demand, giving rise to different prices a t different


those customers who have bought steadily in off
periods. T o be effective, and profitable, the proc­
ess o f stabilization may require something more
than rewards to good customers; it may also be
necessary to apply penalties to bad ones. And the
firms may be compelled to refuse the casual busi­
ness o f new customers at the peak o f a sales boom.
Were our markets not so im perfectly competitive
and characterized during normal times by “ buyers’
markets,” businessmen would realize more keenly

that peak-load, fair-weather customers are often
very expensive customers who do not pay their
Most o f the above patterns o f price and market
behavior have already been tried on a lim ited
scale. Often they have later been abandoned be­
cause they were not economical. It might well
prove to be otherwise in a world o f guaranteed
wages, where the penalties for unstable produc­
tion would be considerably greater than at present.

The analysis o f previous chapters shows that
there is much to be said fo r guaranteed wages,
particularly for seasonally or otherwise unstable
industries operating in an economy with relatively
high and stable levels o f aggregate demand. But
it also suggests that guaranteed wages cannot be
regarded as a cure-all for depressions. There are
important limitations to the device as an anti­
depression measure—especially in comparison
with other economic policies such as fiscal policy
and other full-employment programs. In view o f
these limitations, so long as our society suffers
from rather wide fluctuations in business activity,
guaranteed wage plans should be introduced only
with proper safeguards.
This conclusion is so important that we think
it worth restating in a slightly different form . W e
do not believe that the limitations referred to
above warrant the conclusion that guaranteed
wage plans are economically unsound and should
be abandoned as goals. However, these reserva­
tions are sufficiently important to put us on guard
against viewing the guaranteed wage as a solu­
tion fo r the problem o f unemployment; and
especially to warn us that it cannot and should
not become a substitute fo r social security mea­
sures or a full-employment program. In this con­
cluding chapter, we should like to put forward for
discussion four policy recommendations.
Becommendation No. 1. Guaranteed mages
should he a m atter fo r voluntary collective bar­
gaining without legislative compulsion by the
Government.— Our analysis has not led to the con­
clusion that the Government should seek to inter­
vene actively by legislation to require that indus­
try introduce guaranteed wages. In the present
state o f our economy, this is a matter that should


be left to voluntary free collective bargaining be­
tween management and labor.
Becommendation No. 2. In many lines guaran­
teed^ wage plans may properly include limita­
tions as to the employer's liability.—From our
previous analysis, and from a factual survey o f
earlier depressions, it appears that unqualified
guaranteed-wage plans, indiscriminately applied
to industries subject to wide cyclical swings o f
demand, might involve such extensive financial
costs as to prevent industry from undertaking
such program s; or if industry had nevertheless
undertaken such programs, they might have to
be prematurely abandoned in order to avoid
Some sort o f limitation is therefore necessary.
Existing guarantee plans provide for various
kinds o f lim itations: coverage o f less than all
workers; guarantee o f work for a limited number
o f weeks per year (fo r example 40 w eeks); guar­
antee o f less than full-tim e weekly pay fo r weeks
covered; provision for nonrenewal o f the guaran­
tee ; and so forth. W hat is above all needed, how­
ever, is a form o f limitation which w ill in normal
times give a maximum o f security and protection
to the worker, and to the employer a maximum
incentive to stabilization efforts; but which, in
emergency times, w ill come into effect to keep the
firm’s financial liability under the guaranteed
wage within reasonable limits.
Because o f the ever present danger o f cyclical
slumps we tend to look with favor on some sort
o f limitation on the percentage o f the total guar­
anteed pay roll that the firm shall be liable for in
any year or contract period. So long as production
declines are not too great, workers w ill receive 100
percent o f their fu ll normal income. But if and

when deep depression years come along, and lay­
offs from productive work involve more than, say,
10 percent (or some other suitable ratio) o f the
guaranteed payroll, then the workers may have to
receive something less than the fu ll guarantee.
The precise percentage liability is a matter for
experimental determination over time, and would
no doubt vary from industry to industry depend­
ing upon their differing degrees o f cyclical vari­
ability.86 F or many lines o f activity, 10 percent
may be a reasonable percentage limitation.
W ith such a limitation, it should not be necessary
fo r private industry to accumulate unduly large
reserve funds. Moderate reserve accumulation
may be considered necessary fo r prudent financial
management; and, if not excessive over the whole
period o f the cycle, the accumulation and subse­
quent expenditure o f the reserves may contribute
to dampening the business cycle, helping to con­
tract excessive boom-time purchasing power and
to expand it during depression. But i f ever the
guaranteed wage should be widely adopted, and if
substantial private reserve funds were accumu­
lated in addition to the continually accumulating
governmental reserves for old-age security and
unemployment insurance (currently around 14
billion dollars) the problem o f maintaining high
employment might be made more difficult.
Momentarily, the continued growth o f these
social security trust funds is helpful as an antiinflationary device. Nevertheless, over the long
pull we believe these programs should be placed
more nearly on a pay-as-you-go basis. Similarly,
we should not like to see a long-run accumulation
o f large guaranted wage reserve funds. Whether
for social insurance or guaranteed wages, moderate
reserves that could be drawn on in the depression
phase o f the cycle would, however, not only be
permissible but desirable. They would help to
serve as an automatic anticyclical compensatory
W ithin the collective-bargaining contract itself,
there would probably have to be included certain
special stipulations further lim iting and qualify­
86 The Latim er Report on guaranteed wages presents data show­
ing w hat the costs to a number o f industries of an unqualified
guarantee would have been in earlier years. See ch. V II I, pp. 7 0 100. The report discusses the rather intricate problem o f how
the guaranteed wage funds are to be allocated among the laid-off
workers whenever the drop in production turns out to be great
enough to bring the percentage limitation into effect.

ing the guarantee o f work. For example, there
might be a stipulation that wages would not be
payable to workers out on strike. Collective-bar­
gaining clauses might be introduced into the guar­
antee also lim iting wages o f workers in the plant,
not themselves on strike but rendered unable to
work by virtue o f strikes outside the plant—or
for that matter inside the plant but in another
department or craft. Thus a transportation strike
might so impair the flow o f supplies as to make
a continued guarantee unbearably costly. A ll
these are matters for free collective bargaining.
The primary purposes o f guaranteed wages are
to insure workers more security and promote sta­
bility o f production. The device is not intended
to create permanent quasi-feudal rights o f a worker
to a given job. Thus, if a sweeping technological
change makes it no longer necessary to keep the
previous number o f workers attached to an in­
dustry or firm, or if there is a secular change in
people’s tastes and demands, then the guaranteed
wage should not serve to freeze workers to their
old jobs and techniques and to thwart our econ­
omy’s increases in efficiency and responsiveness to
demand, upon which the ever-rising standard o f
American living fundamentally depends.
Most changes are not introduced discontinuously and suddenly. The normal attrition o f the
labor force o f a firm, through turn-over and sepa­
ration, makes it possible to reduce gradually the
number o f workers without undue lay-offs.
Where this is not the case, the guaranteed wage,
together with severance pay, may perhaps be used
to soften the impact o f the socially-desirable proc­
ess o f change upon the workers directly involved.
But we feel it necessary to point out the danger
that, with guaranteed wages introducing length
o f tenure as a new variable in the collective-bar­
gaining negotiation, the long-term flexibility o f
our economic system may be impaired unless or­
ganized labor is w illing to waive or lim it the scope
o f the guarantee in situations involving perma­
nent changes in technology and demand.
Recommendation No. 3. Corporate income tax
lam and practice should be changed so as to en­
courage guaranteed mage programs.—Under pres­
ent tax law and practice, corporations may for
tax purposes deduct as an expense all payments
made to workers under guaranteed wage pro­
grams, during the year when such payments are


made. Suppose, however, that a corporation
wishes in good times to set aside a reserve fund in
anticipation o f the time when it w ill have to pay
out guaranteed wages to the workers it is cur­
rently hiring. Such appropriations to guaranteed
wage reserve funds—unlike retirement pension
and profit-sharing programs—cannot now be
treated as an expense to be deducted from taxable
earnings in good times; only later, when actually
paid out, can they be so treated.
The present tax situation is, therefore, in a sense
discouraging to guaranteed wage plans. It is,
however, easy to exaggerate the quantitative im­
portance o f this whole matter. A few years’ de­
lay in receiving a tax reduction or credit means
prim arily the loss o f interest on the sums involved.
This is all the more true to the extent that cor­
porate income tax rates remain stable, and to the
extent that a system o f carry-forward (and carry­
back) is in force so that the accounting period for
tax purposes becomes longer than a year and varia­
tions in income are averaged over a longer period.
There seems to be no question that any change
in existing practice would require new legislation
by Congress. This might take at least two possible
forms. First, Congress might specifically provide
that any guaranteed-wage payments might be
carried back over previous years as deductible ex­
penses. In effect, the company would be reim­
bursed fo r its previously overpaid taxes, resulting
from its previously overstated earnings—over­
stated because the accruing liability for guaranteed-wage payments had not been recognized as
an expense o f production at that time.
A second method o f handling this problem
would be to permit appropriations to the reserve
fund to be deductible as expenses during the year
when they are being set aside. Then, later when
the reserve is being used to finance guaranteed
wages, such outlays would not again be chargeable
as an expense and as a tax deduction—for, other­
wise, there would be an unwarranted tax loss to
the Treasury and an unfair subsidy to the guaran­
teed-wage plan. So far this second plan seems
simple enough; but under some circumstances d if­
ficulties may arise. W hat if more is appropriated
to the reserve than is ever necessary to meet guar­
anteed wages, either because o f good luck, or be­
cause o f good stabilization planning by the
employer, or because the employer deliberately


builds up an excessive reserve? Certainly under
these circumstances it would be wrong to permit
the employer to recover the excess reserves, and to
escape corporate income taxation completely on
the sums involved. For this reason, it would be
necessary to insist that the reserve be a “ trust,”
created to provide guaranteed wages or other
benefits for the workers. The trust would neces­
sarily have to be irrevocable as far as the corpora­
tion was concerned.37
Our previous economic analysis and the specific
accounting aspects o f guaranteed wages justify,
we believe, the recommendation that the present
tax deterrents to guaranteed wages be removed
by one or another o f the above described m ethods:
that is by a specific carry-back on guaranteed wage
costs, or by tax deductibility (w ith safeguards)
o f appropriations to guaranteed wage reserve
Recommendation No. 4. Social security legis­
lation should he altered so that guaranteed wage
plans can he integrated with the unemployment
compensation system to the mutual advantage
o f ecwh.—Guaranteed wages should never be looked
upon as a substitute fo r our existing unemploy­
ment-insurance system. This system admittedly
needs substantial improvement and strengthening.
And we believe that guaranteed-wage plans if in­
tegrated with social security could operate in this
direction. Such integration would serve to
strengthen rather than weaken the system o f un­
employment insurance.
The workers o f employers who maintain wage
payments under guarantee plans should be per­
mitted to draw unemployment benefits, provided
that they are unemployed in the sense that would
qualify them for unemployment compensation in
the absence o f a guarantee.38 I f the employer
had to pay only the difference between the full
guaranteed wage and the amount paid by the un­
employment insurance system, then he might be
more w illing to undertake such wage guarantees
and more w illing to broaden the coverage and ex­
tend the duration o f the guarantee.
87 Any excess reserve funds might be finally used up if aU
further appropriations to the reserve fund were curtailed. I f
even this does not meet the problem, the terms of the trust should
stipulate that any remaining excess funds be used for the benefit
of the workers through providing old-age pensions or for some
other welfare provision now permissible from the tax standpoint.
88 Some im portant technical and administrative problems have
to be faced. These are discussed in M r. Latim er’s report.

Moreover, the employer would then be in the
position o f wishing to support the extension o f
Social Security instead o f—as under the present
system o f merit rating—having a financial in­
terest in keeping its benefits limited. The only
alternative to the method o f “ integration” here
proposed, that would tend to remedy the present
discrimination against the employer who volun­
tarily agrees to guarantee fu ll incomes to his idle
workers, would be the method o f further extending
merit rating—perhaps to the point where all em­
ployers with effective guaranteed-wage plans
would be excluded completely from all unemploy­
ment insurance taxation. W e should consider the
adoption o f such an alternative as something o f a
calamity, designed to divide and weaken the
forces making for an effective social security sys­
The method o f integrating social-insurance
benefits with guaranteed-wage plans would have
just the opposite effect, as we have already indi­
cated. It would serve to strengthen rather than
weaken our social-insurance system. In addition,
the integration with present unemployment com­
pensation would have the further advantage o f
reducing the tendency fo r guaranteed wages to
freeze workers to a given employment when it may
be socially desirable for them to transfer to other

occupations. Under the integrated plan, in order
to draw unemployment benefits, workers would
have to be registered with the central employ­
ment exchange, and would be obliged to accept
suitable alternative employment. This would
lessen but not obliterate the tendency for 100 per­
cent income maintainance to have deleterious
effects upon the m obility o f labor.
Important as these legislative changes are, we
do not mean to im ply that the growth o f guaran­
teed-wage plans should wait upon the reforms
here suggested. On the contrary, in some lines o f
industry the guaranteed wage can be economically
introduced under present conditions to the ad­
vantage o f all parties. As the number o f such
industries grows, both employers and employees
would have an increasing incentive to press for the
needed legislation.
These legislative reforms, especially the inte­
gration with social security, would make it pos­
sible to strengthen such guaranteed-wage plans as
may in any event be developed without waiting for
new legislation; and they would encourage the
spread o f plans to other industries which (even
with some kind o f limitation o f employer liabil­
ity) might otherwise find it difficult to set up ade­
quate and satisfactory programs.


N o t e : This Addendum is presented as a basis
fo r further discussion. It does not constitute a
part o f our Recommendations.

The analysis o f previous chapters points to the
conclusion that the guaranteed wage would be a
weak rod to lean upon, by itself alone, as an anti­
depression measure. Taken in conjunction with
other measures—especially fiscal policy and social
security—it can serve a useful purpose as a supple­
mentary device. The guaranteed wage is not a
cure fo r depressions. However, as we have seen
in chapter V , it could perhaps serve its most use­
fu l purpose by overcoming seasonal or other
irregularities o f employment in industries oper­
ating in an economy with relatively high and
stable aggregate demand.
But industry cannot safely assume that we shall
in fact achieve in future a continuing high and
stable level o f demand for goods and services. It
is precisely the fear o f recurring major depres­
sions that makes management reluctant to under­
take commitments under the guaranteed wage.
So long as the prospect o f serious depressions
remains as a m ajor but incalculable risk, guaran­
teed-wage commitments must be rather severely
restricted with respect to the liability involved.
Such restrictions could be eased somewhat by
building up in good times guaranteed-wage re­
serve funds.
Guaranteed-wage plans, privately financed,
could reasonably be regarded as a manageable
risk in a society freed from the fear o f m ajor de­
pression. And even though this danger o f recur­
ring depressions must be faced, plans can, we be­
lieve, be devised along the lines discussed in
chapter V I, which are made as “ cyclone-proof”
as possible. It now remains to consider whether
some direct Government financial support o f
guaranteed wages might not be justified from two
standpoints: (1) as a means o f encouraging, in


an unstable world, more widespread adoption by
private industry o f guaranteed wage plans; and
(2) as a part o f a rounded governmental anti­
depression program.
The purely economic aspects o f such Govern­
ment support deserves to be considered on its own
merits. In terms o f political realism, so long as
we are not prepared to accept direct Government
contributions to social insurance programs (a
policy adopted at the very inception o f social in­
surance in England a generation a g o), there is no
likelihood that governmental grants-in-aid to
guaranteed-wage plans w ill be acceptable. Social
insurance should be first in line for governmental
contributions from general revenues. This is true,
among many reasons, partly because social insur­
ance is o f universal application (within limits
legally established) and does not apply only to such
individual firms as may voluntarily choose to take
advantage o f Government aid; and partly because
social insurance provides a lower minimum income
than is contemplated in most guaranteed-wage
plans. Virtual universal coverage, taken in con­
junction with the principle o f a national minimum,
commends social insurance as a program deserving
direct Government financial aid and support. The
case is less strong for the guaranteed wage. Until
direct Government contributions to social insur­
ance become a reality, it is probably somewhat
utopian to discuss such aid fo r guaranteed wages.
We should ourselves wish first to see direct Federal
contributions to social insurance, thereby dimin­
ishing the deflationary effect o f the regressive
pay-roll taxes.
Nevertheless, the economics (apart from the
politics) o f support for the guaranteed wage de­
serves study. In terms o f employment and anti­
depression policy, there is much to be said for
governmental grants-in-aid to guaranteed-wage

programs. Indeed, even with respect to social in­
surance, Government contributions commend
themselves in large part by reason o f their implica­
tions with respect to fu ll employment policy. The
more social insurance is financed from progressive
income taxation, the more expansionist w ill the
program be.
Our exploratory discussion, in this addendum,
o f partial governmental aid to the guaranteed
wage, contingent upon emergency depression con­
ditions, is very much in the spirit o f many o f the
less controversial Government programs in other
spheres. Federal insurance o f bank deposits and
the capital salvage activities o f the Reconstruction
Finance Corporation are more or less analogous
instances. A third and more venerable precedent
is that o f central banking (Bank o f England, the
Federal Reserve System, etc.) whose function has
long been recognized as that o f providing succor
o f “ last resort” in times o f crisis and depression.
Accordingly, we wish to raise the question
whether the program o f financing guaranteedwage plans might not, to a degree, be incorporated
in a comprehensive antidepression program, such
as the Government may find itself called upon
to undertake in periods o f substantial unemploy­
ment. W e believe that there are few, i f any, who
doubt that we shall in fact encounter more or less
violent fluctuations in business activity. A slump
once started can cumulate, under modern condi­
tions, with incredible speed. The Federal Gov­
ernment will not be able to stand by without under­
taking some positive program o f action. In such
periods, governmental intervention in various di­
rections w ill be required in any event. In such
periods o f crisis, therefore, governmental support
for existing guaranteed-wage plans might provide
one additional compensatory mechanism, thereby
reducing somewhat the danger o f unplanned and
makeshift depression projects which otherwise are
likely to be undertaken.
W e believe, as we have repeatedly stated, that
worker income security can best be promoted by
strengthening our already established system o f
social security and by a comprehensive full em­
ployment program designed to maintain a high
and stable level o f demand, production and em­
ployment. W ithin this pattern, the guaranteed
wage can be made a useful supplementary device.
It is not something upon which we should embark

with a view to making it carry the whole load. It
is not and cannot, we believe, be made the basic
foundation o f worker income security. But it can
be made a significant part o f a larger program.
T o this end we explore below two highly tenta­
tive suggestions. W e present them, not because
we believe them currently to be within the range
o f practical politics, but to round out our economic
analysis o f the guaranteed wage, and to provide a
starting point for further discussion. W e suggest,
in line with the discussion in Chapter Y , that guar­
anteed-wage programs shall be wholly privately
financed except in abnormal emergency periods o f
serious depression. W e consider governmental
aid to such plans only as a last resort measure, and
as a part o f a comprehensive attack on depression.
W e therefore explore two criteria indicating at
what point in the depression phase o f the cycle
governmental aid might be invoked. The first is
based on the level o f profits o f the firm in question;
the second is based on the broad general level o f
business activity in the nation as a whole.
Precisely in a condition o f serious mass unem­
ployment, government support for the continua­
tion o f guaranteed wage plans may be far more
sensible than ill-designed antidepression measures,
which in the absence o f adequate planning are
likely to be improvised. I f a firm were assured
that, upon a fall in the annual profits o f the com­
pany to a small fraction o f, say, the previous
5-year average, the Government would come to its
support, the guaranteed wage plan might be saved
from extinction; and what is more, many firms
might be induced to establish guaranteed wages in
good times, if. they were assured that the Govern­
ment would bear part o f the costs contingent upon
a deep depression when profits are low and losses
are likely to be sustained. W hile it is true that
special conditions may cause low profits for an in­
dividual firm even though general business activity
is high, nevertheless experience shows that the
profits o f most firms fluctuate in close correlation
with the cycle. A more complicated formula than
the one we suggest below might be designed so as
to combine both the criteria o f (a) the firm’s
profits and (5 ) the general state o f business.


Using the more simplified formula, however, let
us suppose that the firm’s profits have fallen to 30
percent (or some other appropriate figure) o f the
previous 5-year average. The Government might
now undertake to contribute a grant-in-aid on a
sliding scale basis, and increasing at a specified
rate as profits continue to fall. The scale might,
by way o f illustration, be somewhat as follow s:
Percent profits o f previous 6-year
Government ehare of
average :
guaranteed wage cost
3 0 ___________________________________________
2 5 __________________________________________
2 0 __________________________________________
1 5 ___________________________________________
1 0 __________________________________________

According to this formula, the Government would
make an outright grant-in-aid to the current cost
o f the guaranteed wage plan (that is, to the guar­
anteed wage payments fo r workers declared by
the company to be totally unemployed) beginning
at 10 percent o f the cost when profits fa ll to 30
percent o f the previous 5-year average. The
grant-in-aid might rise on a step-up basis as profits
fa ll, finally reaching a maximum o f 50 percent o f
the cost when profits fall to 10 percent or less. (A
more precise formula is given below.)
In the next section we wish to discuss an alter­
native grant-in-aid procedure, based not on the
profits o f the particular firm, but on more general
employment and business conditions in the Nation
as a whole.8®
The feasibility o f a guaranteed wage, financed
by private business, depends in large measure
upon the kind o f economy we shall have in the
future—how violent w ill the fluctuations in the
gross national product (G N P ), employment and
business activity be? T o the extent that we suc­
ceed in narrowing the over-all range o f fluctuation
in the gross national product, the guaranteed
wage becomes more feasible as a practical proposi­
tion. It is not feasible fo r guaranteed wage plans
to include any substantial proportion o f the total
w Again it may be noted th at a more complicated formula
m ight be constructed which combines both criteria.
On this
basis, the governmental grant-in-aid would apply only when
both general business conditions and the firm’s profits had fallen
to a certain level.


labor force in a society in which the gross national
product fluctuates from 100 billion dollars to 50
billion dollars and then up to 200 billion dollars, as
it actually did from 1929 to 1944. I f, however, we
could narrow the range o f fluctuations in the gross
national product to within 15 to 20 percent, it
would become feasible to include in guaranteed
wage plans a substantial percentage o f the total
labor force.
Grants-in-aid to guaranteed wage plans, once
the gross national product had fallen to a cer­
tain level—fo r example, to 85 percent o f a fu llemployment level—might well be included as a
part, however modest, o f a general antidepression
program. There would indeed be no guarantee
that the gross national product might not fa ll
far below the level at which grants-in-aid would
begin. The program would amount to no com­
mitment with respect to fu ll employment. It
presumably would mean that the Federal Govern­
ment would seek to promote fu ll employment by
such politically acceptable measures as were avail­
able. I f these were reasonably successful, the
gross national product might not fa ll to the level
at which the grants-in-aid program would begin.
Up to this point, private business would be ex­
clusively responsible fo r the financing o f such
guaranteed wage plans as had voluntarily been
put in operation.
The grant-in-aid could be stepped up if the GNP
should continue to fa ll to lower levels. It is here
suggested, by way o f illustration, that at 85 per­
cent o f a full employment GNP the grant-in-aid
might equal 25 percent o f the current cost o f any
guaranteed wage plan, i. e., 25 percent o f the
amount actually paid out in wages to workers cov­
ered by the plans over and above the wages re­
ceived by workers fo r productive employment to­
gether with unemployment compensation, during
the year or period covered. I f the GNP should
fa ll to 80 percent o f the fu ll employment level, or
below, the grant-in-aid might be raised to 50 per­
cent o f the cost. (A more precise form ula is given
The criterion has been stated in terms o f the
gross national product (G N P ). In point o f
fact, the statistical calculation o f the GNP is
neither sufficiently current nor sufficiently precise
to provide the basis fo r a legal determination o f
the point at which a grant-in-aid would be made.

Some other statistical index which is precise and
unequivocal, but which reflects fairly accurately
the fluctuations in the gross national product,
would have to be found. This is a matter which
w ill require much careful study. Possibly the
ratio o f the number o f workers receiving bene­
fit payments under the unemployment insurance
system to the total number o f workers covered by
the system might serve as an appropriate index.
But the ratio should be applied so as to permit the
entry o f grants-in-aid (together with the step-up)
as nearly as may be at some such points in the level
o f the gross national product as were indicated
It may be appropriate to note that the system
o f “ compensatory payments” to farmers, advo­
cated by some leading agricultural economists,
offers an interesting analogy to the suggestion to
support guaranteed wage plans at say 80 or 85
percent o f a “ full employment” GNP or below.
The agricultural “ compensatory payments” plan,
very briefly, may be explained as follow s: 40 The
plan does not envisage any price controls or mar­
ket price supports. Assume that, as a result o f
a depression, the market price o f a given farm
commodity falls below 85 percent, say, o f the pre­
depression base. Assume the predepression price
was $1 and it now falls to 60 cents. The Govern­
ment then undertakes to make compensatory pay­
ments to all farmers covering the difference
between the price actually received (60 cents) and
85 cents, the guaranteed 85 percent o f the prede­
pression base. Such payments would provide
minimum income security to farmers without in­
terfering with market forces. Prices would not
be raised. The commodity would not be “ priced
out o f the market.” But the farm er would be
A nd the compensatory payments
would be made by the Government at just the phase
o f the cycle when it is important for the Govern­
ment to find sensible, useful and justifiable out­
lets fo r public expenditures—expenditures needed
to swell the diminishing income stream and stop
the cumulative collapse. A s soon as recovery had
proceeded to a point at which the price o f the com­
modity had again reached 85 percent o f the pre­
40 See Theodore W . Schultz, Agriculture in an Unstable Econ­
omy (M cGraw -H ill, 1 9 4 5 ), pp. 2 2 0 -2 3 5 . This is a research study
for the Committee for Economic Development.

depression base, the Government support would
So also in the Government’s support o f the guar­
anteed wage; as soon as the GNP had recovered to
85 percent, say o f the “ fu ll employment level,” or
the more specific and definitive index indicative o f
the degree o f full employment (such as the ratio
o f current beneficiaries to the number o f covered
employees), the Government’s support o f estab­
lished guaranteed wage plans would cease.
Our two suggestions involve one possible tech­
nical difficulty from which the agricultural com­
pensatory payments plan is free. According to
that plan, as farm prices drop from 86 percent o f
the predepression base down to 84 percent, nothing
very drastic or discontinuous happens. Such a
small change is accompanied by a commensurately
small change in Government payments. A ll
trouble o f “ discontinuous brackets” is avoided.
Our two suggestions seem to involve this tech­
nical difficulty. As a firm’s profits suddenly fall
to below the critical 30 percent level, or as GNP
falls below the critical 85 percent level, suddenly
and discontinuously the payments o f the Federal
Government go from nothing to the first bracket
rates. This might give rise to troublesome litiga­
tion concerning the last decimal point o f profits
and GNP, and might even occasion deliberate
efforts on the part o f firms to cause their profits
to fa ll!
These bracket difficulties can be avoided by
making our grants-in-aid formula or table
slightly more complex.
Thus, just as the Government financial share
grows from 10 to 20 percent as profits fall from a
30 percent level to a 25 percent level, so we might
arrange for the Government’s share to rise grad­
ually to the first 10 percent level, corresponding
to the gradual fall in profits from 35 to 30 percent.
Our exact formula might be something like the
follow ing:
( а ) When percent o f corporate profits to nor­
mal are above 35 percent—nQ Government aid.
(б ) When percent o f corporate profits to nor­
mal are less than 10 percent—Government aid
equal to 50 percent o f cost.


(c) Anywhere in between these two extremes
we suggest the form ula:
Percent o f Government aid equals 70 minus (2
times the percent profits are o f norm al). This
could be written as an equation as follow s:
G = 7 0 —2P, in which G is the percent o f govern­
ment aid and P is the percent which current profits
are o f normal profits.
This w ill be found to agree with the earlier table,
and to avoid all bracket difficulty.
Sim ilarly, our second formula based on GNP
too might be as follow s:
(a ) Percent o f GNP to fu ll employment GNP
above 90 percent—no Government aid.
(b ) Percent o f GNP to full employment GNP
below 80 percent—Government aid equal to 50
percent o f cost.
(c) Anywhere in between, the form ula:
Percent o f Government aid equals 450 minus
(5 times the percent o f GNP to full employment
G N P ). This could be written as an equation as
follow s: 6r'=450 —5P ', in which G' is the percent
o f Government aid, and P ' is the percent which
the current GNP is o f a fu ll employment GNP.
The two alternative grant-in-aid procedures
which we have outlined would have a number o f
advantages. They would leave to collective bar­
gaining, or to the employer alone in the absence
o f collective bargaining, the choice o f whether or
not to set up a guaranteed wage. Under the pro­
cedures here suggested, if a guaranteed wage plan
is set up, the responsibility would devolve wholly
upon private enterprise so long as (a ) profits
equalled 35 percent o f the preceding 5 years, or
(b ) alternatively the gross national product did
not fa ll below 90 (85 in the cruder form ula) per­
cent o f a fu ll employment product. The respon­
sibility o f the Government, up to this point, would
not relate to the guaranteed wage, but rather to
policies and programs that promote high business
activity and high employment. Thus up to the
point indicated the Government would not enter
the picture at all with respect to the guaranteed
wage programs so far as direct grants-in-aid are
Should, however, the situation with-respect to
individual businesses, or alternatively with respect


to the economy as a whole, become serious, Govern­
ment support in a variety o f directions would
sooner or later become necessary. Grants-in-aid
for established guaranteed wage plans might well
prove, in such circumstances, to be one measure
which along with others might stop a deflationary
spiral. There is increasingly general support for
the thesis that early and vigorous support in
many directions is less dangerous than delay, and
is much to be preferred to risking all on any one
policy. Reasonably early action may prevent a
bad situation from getting worse.
A long with other antidepression measures,
grants-in-aid to established guaranteed wage plans
could help to put a cushion under a recession and
prevent a further downward cumulative move­
ment. The governmental grant-in-aid would in­
volve the payment o f funds into the income stream
at a time when a Nation-wide depression is becom­
ing really serious and needs to be stopped quickly
and effectively. Planned public works and public
development projects can play an important role,
but many such projects cannot be timed quickly
nor can they be adequate to check, without the aid
o f other measures, a cumulative downturn. W hat
other programs may be necessary or desirable (in ­
cluding tax adjustment) is not a matter which
properly comes under discussion here.
The plans discussed above would be automatical­
ly self-disciplinary. I f the particular guaranteed
wage plan introduced by an individual firm were
overly cautious, it would be relatively ineffective.
It would cost the firm very little, and by the same
token, it would cost the Government very little;
and it would not satisfy labor. I f the plan were
overly ambitious, it would be costly to the firm
up to the point at which the governmental grantin-aid would begin. This fact could be counted
upon to deter the company from setting up too am­
bitious a plan. I f the firm had failed to make
good on its financial responsibilities under the
plan, having dropped it entirely either in accord­
ance with the terms o f the plan or in violation o f
these terms, the Government would have no re­
sponsibility to undertake the grant-in-aid. Gov­
ernment support would be accorded only such
plans as were actually in fu ll operation at the
point where grants-in-aid were scheduled to begin.
As soon as the GNP again rose to a level above the

point indicated (or alternately profits rose) the
Government support would cease.
On this basis every firm would know that any
plan it might inaugurate would entail financial
obligations to cover the entire cost o f the guaran­
teed wage fo r its covered employees only under
reasonably favorable conditions. In the event o f
a nation-wide depression, it could rely upon Gov­
ernment support. The business firm must indeed
prepare a plan which could reasonably be expected
to weather the storm up to the point at which gov­
ernmental aid enters. And even then it must be
prepared to carry its share o f the load. W ith such
guaranteed support, a firm could at least go farther
both with respect to the proportion o f its workers
covered under the plan, and the percent o f the fu ll­
time wage guaranteed under the plan, than would
be the case without such support. How far each
firm is w illing and able to go, under these condi­
tions, is for it to determine fo r itself, either on its
own volition or on the basis o f collective bargain­
ing with the union representing its employees.
There is no governmental compulsion. Any firm
which objects to a guaranteed wage is quite free
to go on without any plan. The governmental aid,
available when conditions become difficult, is in­
deed an inducement, but it represents no compul­
sion whatever to set up a guaranteed wage plan.
It w ill be noted that both o f the suggested plans
are free o f any element o f unfair government
wage subsidization o f one producer as compared to
his competitor. The Government contributes not
a cent toward the wage o f any worker who is to
any degree productively employed.41 Only after
the employer has declared a man completely unem­
ployed would the Government’s aid be forthcom ­
ing. W e do not wish to spell out the details, but
presumably such workers would be required to be
registered with the unemployment insurance labor
exchange, and would be required to accept suitable
alternative employment. Also, as discussed in
chapter V I, we suggest that unemployed workers
should be eligible for regular unemployment com­
pensation benefits, with the employer and govern­
" I t m ight be objected that an element of discrimination and
Inequity is involved in the respect that government aid to the
maintenance o f wage income is applied only to workers who
happen to be employed by firms with a guaranteed wage. This,
however, we should not regard as decisive. W h a t is important is
that firms be encouraged to introduce the guaranteed wage, and
that all firms doing so shall be accorded equal treatment.

ment (under the guaranteed wage plan) making
up the difference as specified in the guarantee.
To some extent these suggestions avoid the criti­
cism that worker m obility w ill be adversely
affected. The employer is still always left with an
incentive—perhaps greater than that now existing
under experience rating—to see that his laid-off
workers accept suitable other employment. None­
theless, we must expect that any system o f almost
100-percent out-of-w ork compensation w ill weaken
the employee’s exertions to find another job and
w ill make him more particular in accepting prof­
fered alternative offers. This, however, is a basic
difficulty o f all guaranteed wages, whether com­
pletely privately financed or financed in part by
the Government. Moreover, the loss o f workers’
incentives toward m obility is a much less serious
economic problem at a time when there is wide­
spread unemployment in all fields.
Since the Government comes in with financial
aid when guaranteed workers are declared com­
pletely idle, there w ill always be some tendency for
firms with guaranteed-wage plans to relax in their
efforts to find low-productivity “fill-in” jobs for
the workers to do in their own plants. As soon as
the Government support came into operation, the
costs incident to the guaranteed-wage plan in any
firm would be carried in part by the Government
and increasingly so as the depression deepened.
There would thus be less incentive left for the firm
to hold down costs by putting the largest pos­
sible number o f covered employees to productive
work or by securing work fo r them elsewhere.
Nevertheless, there would always be some consid­
erable incentive left, since the firm would cover
at first all, then most, and finally at least 50 per­
cent o f, the cost.
The suggestion here made has the great merit
that it could reasonably be expected that active
full employment policies may be sufficiently suc­
cessful so that the GNP would fall below 85 to 80
percent o f the calculated “ full employment” level
only under relatively unusual circumstances, when
the underlying factors were such as to threaten a
really serious m ajor depression. Under this sug­
gestion one may hope that the Government guar­
antee would be invoked on any substantial scale
only in periods o f serious depression when vig­
orous measures to combat the downswing would,
in any event, be necessary.


I f the GN P has fallen below 80 percent o f the
“ full employment level,” the labor market would
already be flooded with a large excess o f appli­
cants. Accordingly, from the social viewpoint, it
would relieve the situation somewhat if the em­
ployees covered in guaranteed wage plans did not
come on the market at all. Moreover, it might not
help the general situation, under conditions o f
falling and low aggregate demand, for firms hav­
ing guaranteed wage plans to enter the market
with competing sidelines to give productive em­
ployment to some o f their covered workers. Such
action, in a period when total demand was sharply
restricted, would contribute little, if at all, toward
an expansion o f aggregate demand. In such peri­
ods, taking on new lines by one firm probably sup­
plants jobs elsewhere rather than adding to the
total. In contrast, in periods o f brisk demand and
full employment, the elimination o f seasonal and
frictional unemployment would represent a net
gain in social efficiency and total real income. I f
all workers were given steadier employment
throughout the year, there would be a net gain in
total output and total real income.
Neither the payment o f compensatory supple­
ments to farmers nor the payment o f wages to idle
workers covered by guaranteed wage plans rep­
resent the ideal situation. The ideal situation
is one o f sustained aggregate demand and full or
high employment. But if, in fact, fu ll employ­
ment policies prove to be only partially effective;
or if wholly abnormal and unexpected factors
emerge which cannot, in the short run, be coped
with adequately, then compensatory payments to
farmers and wage payments to covered workers
under guaranteed wage plans may be valid, justi­
fiable and helpful under the circumstances. The
situation is a temporary one in which unusual and
rather drastic measures may become necessary.
Financial aid to guaranteed wage plans is one
channel o f depression Government spending. In
terms o f the encroachment o f Government activity
on the private sector o f the economy, it is a rela­
tively conservative measure, since it involves only
“ transfer payments” to individuals, who in turn
spend this money as they wish on the products
o f private industry. Thus, it is neither competi­
tive with private industry nor “socialistic” in the


sense o f expanding the productive or collective
consumption role o f Government.
The problem is one o f spending wisely, effec­
tively, and equitably. Giving one favored group
o f workers 100-percent unemployment insurance
while others receive limited partial benefits fo r
a limited time, or no insurance benefits at all but
only relief, cannot be defended as equity. From
this point o f view it might well be desirable to
confine Government aid to plans with some sort
o f time limitation with respect to the period in
which any one worker could continue to draw
guaranteed wage payments. As a first line o f de­
fense against depression, relatively generous treat­
ment o f certain workers for a limited period can
be defended. But it would be more important still
to strengthen our general social security, relief,
and public works and development programs dur­
ing the next serious depression. In the final
analysis, productive and useful employment
should be the goal.
The primary purpose o f the suggestions de­
scribed is to contribute in some measure to the
general insurance against the social plague o f deep
depression. These suggestions, like all insurance
measures, would serve their purpose best if it never
became necessary to invoke them—if the system
always remained at high levels o f employment and
general profits did not decline to low levels as a
result o f adverse business conditions.
T o conclude: An adequate full employment
program would make governmental grants-in-aid
to guaranteed wages quite irrelevant as an anti­
depression device. But in the event, as is not im­
probable, that we shall at times face rather se­
rious unemployment, such grants-in-aid could be a
useful “ last resort” instrument, to be applied along
with other measures as one part o f a many-sided
antidepression program. But while it is necessary
to be prepared with antidepression policies, we
must never lose sight o f the positive program de­
signed to provide continuing and high levels o f
useful and productive employment. Guaranteed
wage plans are not adequate substitutes fo r other
public and private economic policies, even though
they may provide supplementary protection
against instability o f production, employment and

By Prof. J. M . C lark , Columbia U niversity; Prof. E dw ard
S. M ason , Harvard U niversity; Prof. Sumner H.
Su ch te r , Harvard University, together with Final Com­
ments by Professors H ansen and Samuelson

In general, the writer is in hearty agreement
with the actual recommendations o f the report,
and approves o f their cautious and realistic char­
acter. He has, however, a feeling that in the body
o f the discussion this caution is not aways fully
maintained; and here and there, by tone and im­
plication, an impression is conveyed o f promise
o f greater results, both in extent o f voluntary
adoption and in effect on stabilization o f employ­
ment, than are wholly consistent with the cautious
character o f the actual recommendations. The
frequent qualifications which are introduced do
not entirely offset this optim istic impression. A
few major and minor comments follow .
Perhaps the chief aspect which seems insuffi­
ciently recognized is the probability that i f a
guaranteed-wage plan were installed, covering all
or most o f the employees in an industry, the hiring
o f additional workers might involve such a heavy
commitment on the part o f the employer that he
would go slow about such hiring in times o f active
demand, with the result that employment might
not simply be stabilized, but the total reduced.
This would place a heavier burden on the highemployment program which, it is assumed, goes
with the wage program. It might be replied that,
since the wage program is voluntary, employers
would not be likely to undertake commitments so
heavy as to have this effect. This seems not fully
convincing, since the pressure o f organized labor
toward such programs may be very strong, and
may even develop quasicompulsory effects, im­
pelling employers toward assuming heavier com­
mitments than caution would dictate, in the light
o f the possibility here considered.

A second point is that, in view o f the voluntary
nature o f the proposals, more attention might be
given to modified plans, even if they may not so
far have been proposed by interested parties. F or
example, it might be regarded as a defect o f a
simple guarantee from the standpoint o f workers’
incentives, that under it the worker would get paid
no more fo r working the guaranteed amount o f
time than for working less. This could be avoided,
and the employer’s commitment be at the same
time lightened, by a plan under which the worker
would be paid full wages for full-tim e work, and
something less though presumably more than half
wages fo r idle time, down to some absolute
minimum. The guarantee should properly be so
figured as to give the worker something more
than his unemployment benefits under social
security, but less than fu ll pay fo r idle time. This
would avoid asking him, in effect, to work part
o f the time fo r nothing.
Methods o f financing reserves deserve more dis­
cussion than is given them. In voluntary private
plans, the employer would be under strong pres­
sure to invest them productively, in private
securities. Then when they had to be drawn on,
in bad times, i f these securities were thrown on
the market in order to realize funds, the effect
might be to accentuate depression, offsetting the
alleviating effects o f the distribution o f the
proceeds to the workers. This dilemma seems to
deserve consideration; it might be avoided by
some credit arrangement.
A fourth point concerns the effect o f stabiliza­
tion on the productivity o f workers. Here I agree
with the general conclusion that the net effect is
likely to be favorable, and my reservation is largely
concerned with the tim ing o f the effect. Experi­
ence seems to show that when bad times threaten,
workers work harder, and increase their output.
It is when a lay-off does not immediately impend


that workers are urged to make their jobs last as
long as possible, by restraining output. This is
complicated by the effect o f reduced output in
increasing indirect costs per unit produced, so that
total labor cost per unit o f product may rise, or
output per man-hour fall, on account o f this latter
factor, which has nothing to do with the attitude
o f the workers, or how well they work. Dr. Julius
Hirsch, in a paper delivered before the American
Economic Association, January 25, 1947, at­
tempted to separate these two effects on produc­
tivity, and found that the kind that registers the
efficiency o f the workers behaved in the way I have
A fifth point concerns the incentive the em­
ployer has to make capital outlays in slack times,
because o f the lower prices then available. This
is an incentive which must, in the nature o f the
case, stop far short o f fu ll stabilization, since it is
only if demand is slack that prices are likely to
come down. A single industry could get this gain,
in an economy where the rest were still follow ing
the usual practice and concentrating their capital
outlays in active times. But if capital-expansion
in dull times became the standard practice, the
price-incentive would be destroyed. Further, it
is still true that, the longer the employer waits,
before a revival is expected, the shorter is the time
during which his capital is tied up, idle, and the
risk he runs o f installing equipment that does not
embody the latest improvements. Therefore, this
incentive seems to be subject to a much heavier
discount than is indicated in the report.
The incentives o f the employer, arising from
the combination o f a guaranteed wage with social
security, seem to deserve some analysis. It seems
to be implied that the employer could, at his option,
lim it his liability to the excess o f the guaranteed
wage above the regular unemployment-benefits,
by declaring his worker unemployed, and leaving
him to find another job if one is offered. It ap­
pears that this would, in practice, involve him
in little likelihood o f losing a worker through the
worker’s getting another job, because it seems only
natural that the employment office would give
priority to job-seekers who were not covered by
guaranteed-wage plans—this on the assumption
that such plans are voluntary, and have not be­
come universal. Then if social security pays the
worker, fo r example, 55 percent o f his regular


wages, it would pay the employer to let his worker
go onto social security i f the only work the em­
ployer could find fo r him to do were worth less
than 55 percent o f fu ll wages. I f it were worth
more, it would pay the employer to keep him.
In this connection, the discussion o f the loss,
or cost, o f unemployment, gives the impression
that it is the worker’s full wage, or its equivalent,
that is lost, though elsewhere it is noted that the
best employment that is available in depressed
times is likely to be something that is not worth
the fu ll amount o f the standard wage.
Other minor points might be mentioned. The
report suggests the maintenance o f adequate total
demand as a goal, and takes the position that a
fair approach to attainment o f this goal is a pre­
requisite to any general successful adoption o f
guaranteed-wage plans. But no ways and means
are suggested fo r a fu ll employment program nor
is any estimate made o f the probable degree o f
success o f any measures o f the sort which might
be adopted. This is perhaps a matter in the pur­
view o f the President’s committee o f advisers, set
up under the Full Employment A c t; but this com­
mittee does not seem as yet to have filled this

In chapter H , section 1, the report states: “It
is perhaps not too hard to imagine an economic
system in which the wage contract with all em­
ployees was more nearly like that with executives
and white-collar workers than like the present pre­
vailing mode o f wage payment and tenure.” I
agree that present modes o f wage payment show
a remarkable lack o f imaginative adaptation to
the facts o f modem industry. But if this means
that all workers could be put on a basis o f fixed
salary, it is hard fo r me to imagine this under
a system o f private enterprise, in view o f what
seems to be the admitted fact that private enter­
prise is inescapably subject to some degree o f
fluctuation, and probably a fairly substantial
degree, even with the best that can be done toward
stabilization. It is easier fo r me to imagine a
system o f cooperatives in which the workers are
their own employers, and hire capital fo r a fixed
return; but in that case they would necessarily
take the risks that now fa ll on equity capital.
Their salaries might be fixed, but they would be
combined with sharing o f profits and losses.

In conclusion, let me repeat that the actual
recommendations o f the report appear to deserve
Messrs. Hansen and Samuelson rightly em­
phasize the wide range o f variation in types o f
guaranteed wage plans, and in employee coverage
and employer commitments involved. Taking
this range into account it is possible to conceive a
situation in which guaranteed wage plans would
be widely used without any appreciable effect on
worker security or on the functioning o f the econ­
omy. This would be so if the only workers cov­
ered were those the employer could reasonably ex­
pect to retain at the lowest expected rate o f oper­
ations, and if his commitment were subject to fre­
quent revision. Under these circumstances the
acceptance o f the plan would offer no special in­
ducement to the employer to explore ways and
means o f stabilizing employment; it would offer
no appreciable increase in the employees’ security
o f tenure; and it is difficult to see how it would
in any way significantly alter work incentives, in­
come distribution, or, in general, the functioning
o f the economy. Even a wide acceptance o f such
guaranteed wage plans would have the same negli­
gible effect as minimium-wage-rate legislation set­
ting rates substantially below the market mini­
The problem becomes interesting and important
only if plans are adopted committing the em­
ployer to wage payments he would not otherwise
assume and offering a greater measure o f security
to employees than they would otherwise enjoy.
Under what circumstances would the employer be
likely voluntarily to accept such a commitment?
A guaranteed wage plan might be adopted if it
promised to give the employer the pick o f the labor
market, if it were judged to offer new and import­
ant work incentives, and i f possibilities existed for
lessening the disadvantages o f a new overhead com­
mitment by stabilizing operations through diversi­
fication or otherwise.
These are all real possibilities. But it must be
recognized (a) that the advantages o f the plan
depend largely on its not being extensively
adopted by competitors in the labor market, and
(6 ) that the stabilization effects are mainly
limited to the firm and have no appreciable ad­

vantages for business cycle stability in the whole
economy. I f all—or even a large number o f—
employers accepted additional commitments under
guaranteed wage plans in the expectation that
their selection o f employees would be improved
or that their operations could be stabilized by
diversification, the expectations o f a large per­
centage would be unavoidably disappointed. It
must also be recognized that the advantages o f a
guaranteed wage plan, which may be real enough
as long as the number o f such plans is small, may
create additional disadvantages for the firms not
adapting to the scheme.
Some possibilities fo r im proving efficiency or
stabilizing employment, which are net fo r the econ­
omy as a whole, may exist, but these possibilities
would seem to be slight. It is possible that the
productivity o f workers already employed may be
increased by the additional security offered by a
guaranteed wage plan. Hansen and Samuelson
consider this possibility and, in my view, rightly
discount its certainty or quantitative importance.
There is also the possibility that the adoption o f
guaranteed wage plans might lead to the merging
o f operations which are complementary over time
(e. g., coal and ice). Although this would make
no contribution to over-all business cycle stability,
it might lessen the number o f necessary changes in
employment. Again, however, the main effects o f
diversification by particular firms might often be
to increase the instability o f operations o f other
firms. A ll this is simply an elaboration o f the
point that the main influences on stability for the
whole economy lie outside the control o f single
Recognizing this fact, the authors raise the
question whether it is possible for employers in
unstable industries by acting together to contribute
to stability. Although this might be done inde­
pendently o f guaranteed wage plans, it is possible
that the common introduction o f such plans in
an industry could provide an incentive for stabili­
zation otherwise lacking. The question is whether
the causes o f instability lying outside the control
o f individual firms may be to some extent within
the control o f an industry acting as a unit. Com­
menting on the notorious instability o f employ­
ment and output in the automobile industry, Han­
sen and Samuelson emphasize that, to the extent
that this instability is cyclical, the search for


remedies must look in other directions than toward
guaranteed wage plans. “ But,” they say, “ it is
not too much to hope for, and to ask o f manage­
ment and labor, that measures be taken and prac­
tices be altered to moderate the incidence o f
irregular and seasonal employment and o f eco­
nomic idleness. This may require many farsweeping changes in the organization o f the indus­
try ; increases in inventories and storage facilities,
limitations on undue coddling of consumers’ de­
sires with respect to modification o f style and
model changes, perhaps acceptance o f lower hourly
wage rates in exchange fo r higher annual
It is possible that action o f this sort might
make a substantial contribution to stability o f em­
ployment in automobile production. It is prob­
able that the suggested changes would increase
costs and prices to consumers. It seems to me
unlikely that standardization, for example, could
be brought about without collusive action or a
degree o f cooperation among competitors be­
yond the limits permitted by present public policy.
Perhaps existing policy should be changed. But
this question raises issues o f considerably greater
importance than those involved in guaranteed
wage plans. It seems doubtful whether the sta­
bilization possibilities lying outside the control o f
individual firms, but within the control o f the
industry, are o f sufficient importance, in them­
selves, to justify the degree o f industry planning—
with the concomitant necessity o f Government
supervision—it would be necessary to achieve in
order to realize these possibilities. In any case the
question opens vistas too broad for adequate con­
sideration here.
I f the scope o f guaranteed wage plans is pri­
marily determined by profit considerations and if
industry-wide stabilization operations (which
might broaden the opportunities for such plans)
are excluded, it does not seem probable that a
system o f wage guarantees w ill be widely adopted,
at least in an economy as unstable as the American
economy has historically been. Yet the most
important and interesting questions that Hansen
and Samuelson discuss assume a substantial cover­
age o f the economy by guaranteed wage plans. It
is possible that, if accompanied by effective
counter-cyclical stabilization measures, the cover­


age o f wage guarantees would in fact be substanti­
ally increased. This w ill be discussed presently.
The important questions referred to above have
to do with the changes in aggregate demand and its
stabilization over the cycle and with the effect o f
the increase in overhead costs involved in guar­
anteed wage plans on pricing policy.
W ith respect to the first question, the authors
point out that the level o f aggregate demand is
not likely to be raised by guarantee o f wages unless
such guarantees transfer incomes from profits to
wages and unless these transfers increase marginal
propensities to consume. They are properly dubi­
ous about such effects. Even if wage guarantees
clearly worked in this direction, it would still be
difficult to see why employers would voluntarily
accede to them unless we suppose a general under­
standing and agreement among businessmen that
their own long-run best interests are served by the
higher and more stable level o f employment that
the acceptance o f a lower rate o f profit might be
supposed to entail. It seems probable that the
“ Keynesian revolution” has not yet been this
The effect o f guaranteed wages as a stabilizer o f
aggregate demand over the cycle depends pri­
marily on the method o f financing. I f reserves
accumulated in good times are paid out in bad,
some stabilizing effect w ill be produced. But un­
less firms can be supposed to undertake commit­
ments o f a character and magnitude that would
substantially increase business risks this effect is
bound to be small. The authors recognize this
fully and their tentative support, in the appendix,
o f Government grants-in-aid to guaranteed wage
plans, stems from this recognition. In part the
case for grants-in-aid depends on the expanded
coverage by guaranteed wage plans that might be
expected to follow from the adoption o f grants; in
part, the case rests in the fam iliar argument for
deficit spending in depression. T o the extent that
deficit spending is the remedy, this type o f spend­
ing has to be justified as against other claimants.
The main advantage, stressed by Hansen and
Samuelson—though not in these words—is that it
can be “ built in” to a functioning economic system
rather than being hastily improvised as so many
kinds o f Government depression spending are.
Although a number o f practical difficulties (hav­
ing to do mainly with inequality o f treatment o f

different firms and industries) are obvious, the
suggestion merits careful attention.
W ith respect to the consequences o f guaranteed
wage plans for price behavior, the conclusion o f the
authors appears to be that the conversion o f vari­
able into overhead costs would probably have only
a slight effect. W hile this conversion might, un­
der competitive pricing conditions, be expected to
lead to greater variation in prices over the cycle,
they think that, in industries likely to adopt guar­
anteed wage plans, market structures are such as to
favor the use o f “ full cost” pricing policies. I f,
therefore, it can be shown that such plans increase
the “ full cost” per unit o f operations over the
cycle, the effect on prices might be considerable.
Regardless o f the extent to which firms may or
may not undertake fu ll cost pricing, it is clear
that any substantial increase in the relative im­
portance o f overhead costs w ill accentuate the dan­
ger to profits to be expected from competitive price
cutting. The tendency to stabilize prices, by agree­
ment or otherwise, w ill thereby be encouraged.
Insofar as the effects are limited to an increased
resistance to price declines in depression, the
writer would agree with Hansen and Samuelson
that the weight o f modern opinion considers
such effects to be contributory to stability in the
whole economy. I f “ cooperation” among competi­
tors is seriously promoted through a widespread
adoption o f guaranteed wage plans, it is improb­
able, however, that joint action would be limited
to resistance against depression price declines. It
is clearly possible that the substantial conversion
o f variable into overhead cost inherent in these
plans might, through the increased incentives it
offers to industry-wide planning, considerably re­
duce the scope o f desirable competitive adjustment
in the economy. It must be admitted, however,
that this question is highly speculative.
It is the view o f the authors o f this report that
guaranteed wage plans are unlikely to play a sig­
nificant role except within the framework o f an
effective national policy directed toward the main­
tenance o f a high level o f employment. In the un­
stable American economy o f the recent past, the
advantages to the employer o f lay-offs on short
notice are o f such importance as to make it improb­
able that more than a small number o f firms w ill
adopt such plans. Furthermore, as already em­
phasized, the advantage o f these plans to the firms

adopting them are likely to be substantial only if
the number remains small.
I f an effective national employment policy can
be assumed, the situation is different. Even under
these circumstances, however, the authors caution
against exaggerating the merits o f a guaranteed
wage program. They state explicitly that “ if it
ever had to come to a choice between guaranteed
wages and other important depression and anticyclical public and private policies, * * * then
it would be guaranteed wages that would have to
be rejected.” It is a great strength o f the report,
in the eyes o f this reviewer, that the relative merits
o f guaranteed wages as against other reform pro­
grams are carefully weighed. In a situation in
which the stimulus to reform is strictly limited it
is important to establish a carefully considered
priority o f objectives.
I f a high level o f employment were expected to
be maintained the coverage o f voluntarily initiated
guaranteed wage plans might, for a number o f
reasons, be very substantial. A much larger num­
ber o f firms could apply such plans to a much
larger percentage o f their employees without an
appreciable increase in business risk. Employers,
faced with a continually serious problem o f re­
cruiting and maintaining a labor force would find
that the relative merit o f guaranteed wage plans as
compared with the privilege o f lay-off at short
notice had measurably increased. Although the
authors find, even in the recent past, little evidence
that instability o f employment is compensated by
higher hourly earnings in unstable industries, it
might be expected that with a high and sustained
level o f employment this condition would be recti­
fied by competitive forces. I f this were so, firms,
even in unstable industries, would probably find it
possible to adopt guaranteed wage plans without
incurring a large increase in labor costs.
On the other hand, although the coverage might
be much larger, the importance o f worker in­
security under such circumstances would be much
less. The authors, nevertheless, believe that guar­
anteed wages might make an important contribu­
tion to stabilizing “ seasonal and other short
rhythms in production and by equitably allocating
the economic burden o f the residual amount o f
unavoidable idleness! and unemployment.” B y
shifting the burden o f seasonal and short-term
unemployment to the shoulders o f employers, the


incentive to integrate operations having comple­
mentary time periods and to undertake industry­
wide planning to increase stability o f output would
certainly be increased.
As we have seen, there are real disadvantages
involved in this process that must be set off against
the advantages. In addition the substantial lessen­
ing or disappearance o f worker incentives to seek
other employment during slack periods would
handicap short-term adjustment. As so often is
the case in the area o f economic policy, there seems
to be a real conflict between security and efficiency
involved in this question o f guaranteed wages. It
is not obvious to the writer that, even if the main­
tenance o f a high level o f employment could be
assumed, the probable disadvantages o f a largescale acceptance o f guaranteed wages would not
outweigh the advantages.
The guaranteed wage is a proposal to impose an
additional liability upon business owners. A l­
though the proposals vary substantially, they have
one common characteristic—the liability to pay
fo r labor which would not otherwise be used is
one which would have to be met in the main, not
in periods o f expansion and optimism, but in
periods o f contraction and pessimism. Further­
more, the amount o f the liability in most indus­
tries would be conjectural in the extreme because
the severity o f business cycles cannot be foreseen.
This second characteristic could be altered some­
what by modifications in the plans. In fact some
existing wage or employment guarantee plans
provide ways fo r reducing the employer’s liability
in the event o f severe depression. Finally, the
liability is o f such nature that it is increased in
amount by the very conditions which decrease the
business enterprise’s ability to meet it out o f cur­
rent income.
Hansen and Samuelson consider two types o f
plans: (1) Pay-as-you-go plans, and (2) reserve
plans in which, however, the liability is not limited
to the amount in the reserve funds. I believe that
a third type o f plan should be examined, namely
reserve plans with liability limited to the amount
in the reserve fund. Hansen and Samuelson make
a suggestion closely akin to this in their recom­
mendations. They suggest that the liability o f
employers be limited. They do not, however, sug­


gest that it be limited to the amount in the reserve
Three basic questions are raised by wage guaran­
tee plans: (1) Their effect upon the distribution
o f incom e; (2) their effect upon the utilization o f
resources; and (3) their effect upon the business
cycle and the growth o f industry. In general
I agree with Hansen and Samuelson with respect
to the effect o f wage guarantees upon the distribu­
tion o f income and the utilization o f resources.
W ith much o f their analysis o f the cyclical effects
o f wage guarantees I am in agreement. There
are, however, some points o f difference. Conse­
quently, I have confined these notes to a discussion
o f the cyclical effects o f wage guarantee plans.
Before I start this discussion I wish to call
attention to the fact that wag'e guarantee plans
would require during boom times a larger spread
than would otherwise exist between the price o f
labor and the prices o f goods. This would be
necessary because o f the risk that employers would
be compelled during slack periods to make wage
payments which are not covered by the value o f
the services rendered. The greater spread between
wages and prices during boom times might be
accomplished either by a rise in prices or by a
slower rise in wages. It is uncertain which o f
these ways would be more important in bringing
about the greater spread between wages and prices.
.I f one assumes that the amplitude o f boom and
depression is unchanged, the distribution o f in­
come over the period o f the whole cycle would not
be significantly changed. W age earners and con­
sumers would fare worse than now during boom
periods and better than now during depressions;
business owners would fare better than now dur­
ing booms and worse during depressions.
Pay-as-you-go wage guarantees
Pay-as-you-go wage guarantees would accen­
tuate business recessions. This result would occur
fo r several reasons. One effect o f pay-as-you-go
plans would be to stimulate managements to
strengthen the liquid position o f their enterprises
at the first signs o f contraction in business. Busi­
ness concerns, o f course, now do the same thing—
especially enterprises which have short-term debts
or other important liabilities to meet. The very
efforts o f business concerns to protect themselves
against the drop in business aggravate the decline.

The pursuit o f liquidity by enterprises during
periods o f contraction ought to be discouraged
rather than encouraged. Pay-as-you-go wage
guarantee plans, however, would encourage it. A ll
o f this amounts to saying that most pay-as-you-go
plans could not be kept strictly on a pay-as-you-go
basis. Even if assets were not earmarked and
called “ reserve funds,” they would be accumulated
against the liability imposed by the wage guaran­
tee plans. Furthermore, under the so-called “ payas-you-go plan,” the accumulation would occur
just when it would do the most harm.
A second effect o f wage guarantees (whether payas-you-go or not) would be to make cost-price rela­
tionships during depressions more unfavorable
than they would be in the absence o f guaranteed
wages. Since workers would have to be paid
whether they produced or not, managements would
be w illing to produce goods which have to be sold
at prices which would not cover cost o f production
computed by conventional methods. Hence wage
guarantees would depress prices and make prices
even lower relative to costs than they would other­
wise be. The effects o f wage guarantees upon pro­
duction would not probably be very great in oligo­
polistic industries. It would, however, be an im­
portant influence in industries where there are
many small competitors, particularly the “ soft
goods” industries.
The unfavorable cost-price relationships thus
produced by wage guarantees and the resulting
drain on liquid assets would put managements un­
der greater pressure than ever to cut expenditures
fo r maintenance, replacement, research, and prod­
uct development. It would also discourage the
starting o f new enterprises. Even in severe de­
pressions there are many thousands o f business
births each year and substantial expenditures on
capital goods for replacement, reduction o f costs,
and expansion by established enterprises.
Special mention should be made o f the effect
o f pay-as-you-go plans upon the operation o f the
credit system during depressions. The liabilities
imposed by these plans would make banks more
eager to reduce outstanding credits to enterprises
subject to the liability and less inclined to extend
new credits. Thus, pay-as-you-go plans would be
a powerful influence in enforcing a contraction in
demand deposits.

The effect o f pay-as-you-go plans upon the de­
mand for labor and upon wages would be unfavor­
able. Naturally enterprises which had wage
guarantee plans that were about to expire would
seek to anticipate their orders for goods after the
expiration o f the plans by making large quantities
o f goods before the expiration o f the plans. Thus
plans which were about to expire would build up
inventories o f partly manufactured and manufac­
tured goods that would prove troublesome. Cer­
tainly the fact that this process was going on and
that inventories were overhanging the market
would discourage both the starting o f new enter­
prises and the execution o f many projects by exist­
ing concerns. The fact that employers who had
built up large inventories under the stimulus o f
wage guarantees would be in an unusually strong
bargaining position in negotiating renewals o f
their contracts with unions would introduce un­
certainty into the whole wage structure o f the in­
dustries affected.
These several difficulties might not be serious if
the depression were mild, but the existence o f a
large number o f pay-as-you-go plans would in­
crease the difficulty o f keeping depressions mild.
I f the depression were severe, pay-as-you-go wage
guarantee plans would appear to be well designed
to make it more severe and to weaken the bargain­
ing position o f unions in renewing contracts which
expire during the depression.
W age guarantee plans with liability not limited
to the amount in the reserve funds
W age guarantee plans financed out o f reserve
funds but with the liability not limited to the
amounts in the reserve might mitigate depressions
provided business managers felt quite confident
that the depression would be mild and that the re­
serve funds would be more than adequate. The
disbursement o f the reserve funds by raising the
propensity to consume would lim it the effect o f a
given drop in investment upon incomes and upon
employment. Furthermore, if businessmen were
quite sure that reserve funds would be more than
adequate, the disbursement o f the funds would
make managements less inclined to cut postponable
expenditures, such as outlays fo r maintenance and
replacements and some expenditures for expansion.
A ll o f the above assumes that managements are
governed by the belief that reserve funds would


be ample. This would certainly not be true in
severe or even moderately severe depressions. As
it became apparent that the depression was going
to be deeper than businessmen had anticipated,
wage guarantee plans financed out o f reserve funds
would produce more and more the same unfortu­
nate effects as pay-as-you-go plans. Furthermore,
even in m ild depressions wage guarantee plans
with the liability o f employers not limited to the
amount in the reserve funds would produce some
unfavorable effects. Some firms would be new
and would have had no opportunity to accumu­
late reserve funds; some would have had a bad
employment record. Hence, at least a few firms
would be led by their liabilities under wage guar­
antees to strive fo r greater liquidity than they
would otherwise have sought. Many more firms,
as a result o f their liabilities, would be viewed as
unattractive credit risks by banks and would be
forced by the reduction o f their lines o f credit
to curtail expenditures on maintenance and re­
placements and possibly to liquidate inventories
at distress prices.
Reserves with liability limited to the amount in the
Guaranteed wage plans financed by reserves and
with the employer’s liability limited to the amount
in the reserves would make a moderate, but never­
theless important, contribution to the stabilization
o f employment. The limitation o f the employer’s
liability to the amount in the reserve fund would
prevent the wage guarantee from stimulating em­
ployers to attempt to increase their liquid assets
during periods o f contraction. Thus wage guar­
antee plans o f this third type would not have un­
favorable effects upon the expenditures o f business
concerns fo r maintenance, replacements, and ex­
pansion. On the contrary, the reserves would
have two favorable effects upon the level o f em­
ployment. First, by increasing the propensity to
consume it would diminish the unfavorable effect
o f a given drop in investment upon income and
hence upon employment. Second, by lim iting the
losses o f business enterprises and im proving the
terms on which they could liquidate their inven­
tories, the disbursement o f the reserve funds would
make managements less inclined to cut expendi­
tures on maintenance and replacements and to
suspend the execution o f plans for expansion.


W ould not the favorable effects o f the disburse­
ment o f reserves during periods o f contraction be
offset by deflationary effects from the accumula­
tion o f reserves during periods o f expansion! I
do not think so. In the first place, favorable e f­
fects o f the disbursements o f reserves during
periods o f depression would cause prospective in­
vestors to take a slightly more favorable view o f
investment opportunities. In the second place,
the accumulation o f reserves would make invest­
ment-seeking funds available on slightly more
favorable terms.
W ould not the accumulation o f reserves during
periods o f expansion lim it expansion by raising
the propensity to save? There are some m ajor
uncertainties in the effect o f the accumulation o f
reserves during periods o f expansion. It is quite
conceivable, as I shall point out presently, that the
accumulation o f reserves would have inflationary
repercussions on the credit system. More likely
is the possibility that the accumulation o f reserves
would m odify the character o f booms by lim iting
the expansion o f credit and the rise in prices.
Booms are periods when incomes rise because the
planned savings o f individuals and business enter­
prises fail to meet the demand for investment-seek­
ing funds. The impatient demand fo r invest­
ment-seeking funds causes the rise o f income to
be accelerated by the expansion o f credit and usu­
ally by a rise in prices and often by speculation
in inventories. The rise in prices limits the favor­
able effect upon employment from a given rise in
expenditures. Furthermore, after this type o f
expansion has gone on fo r some time, it creates
market conditions which discourage business enter­
prises from immediately executing long-term in­
vestment plans. Hence the nature o f booms under
the modern credit system limits the capacity o f
the economy to utilize investment opportunities
created by technological change. W ere expan­
sions financed to some extent out o f reserve funds
rather than by the expansion o f credit, the expan­
sion would probably go farther and the expansion
would consist to a greater extent in a rise in em­
ployment and to a lesser extent in a rise in prices.
Hence, although the effect o f the accumulation o f
reserve funds would be deflationary in terms o f
prices, it would not necessarily be deflationary in
terms o f employment.

There is a real possibility, however, that the ac­
cumulation o f reserve funds w ill stimulate the
expansion o f credit. The reserve funds would un­
doubtedly be invested'largely in the short-term
obligations o f the Government. The buying o f
these obligations by the reserve funds would inter­
fere with the ability o f the banks to maintain the
volume o f their investments in short-term govern­
ments. A t times when the business outlook is re­
garded as favorable, banks are averse to per­
m itting a drop in their earning assets. Hence,
failure o f banks to replace their short-term govern­
ments would undoubtedly lead them to be more
enterprising and aggressive in putting money to
work in commercial loans and term loans. As an
aftermath to the unfortunate inflationary effects
o f the expansion o f bank credit during the boom,
would be the even more unfortunate deflationary
effects produced by the repayment o f these loans in
periods o f contraction.
This analysis o f the probable effects o f different
types o f wage guarantees should not be concluded
without pointing out that the judgment o f the
probable effects o f the plan must be predicated
upon estimates o f the number o f workers whom
such plans may cover and to whom they might
make an important difference. About one-fourth
o f the workforce would not be included because
they are self-employed rather than employees.
A substantial proportion o f the workforce,
even if covered, would get no appreciable
benefit from guaranteed wage plans because
they are virtually assured o f indefinite tenure
under present conditions. These include nearly
all employees in the public service, a substantial
number o f employees in the industries and oc­
cupations with little seasonal or cyclical fluctua­
tions, and a substantial number o f additional
employees who are protected from seasonal or
cyclical lay-offs because o f seniority rules. A third
large group o f employees work under conditions
which would make a 12 months’ guarantee (or
even a 6 months’ and, in many cases, a 3 months’
guarantee) impractical. These include people in
intermittent employments such as most people in
the construction industry, the amusement industry,
the vacation industry, and the large number o f
people who enter the labor market for a few weeks
only during each year. As a very rough guess I

would estimate that about one-fifth or one-fourth
o f the entire w orkforce are employed under such
conditions that a guarantee would appreciably
affect their annual income. This does not mean a
guarantee might not be a useful device in the case
o f this fraction o f the workforce. Nevertheless,
it does indicate, however, that the possible favor­
able effects upon the total volume o f consumer in­
come from all sources would be quite limited. A t
the best, the incomes o f people receiving only about
one-sixth o f all consumer incomes would be
directly augmented to an appreciable extent by
an annual wage guarantee.
B y A lvin H. H ansen and P aul A. S amuelson

The comments o f Professors Clark, Mason, and
Slichter are particularly welcome and valuable
because the complex imponderable factors in­
volved in an economic evaluation o f guaranteed
wages cannot definitively be appraised by one
team o f investigators. Accordingly, we wish to
confine our reaction to their comments to a few
o f the more important points where there still
remain some substantive difference in analysis and
1. Depressant effects upon investment due to
higher wage costs.—A ll three writers emphasize—
as we do too (pp. 29-31)—that guaranteed wage
commitments may act as an appreciable deterrent
to business investment. Taken by itself, this is a
damning consideration. But it should not be
taken by itself, since there may also be a favorable
effect upon income when wages are maintained.
There is a universal dilemma to be faced here,
which goes fa r beyond the guaranteed wage.
Compulsory workmen’s compensation legislation,
minimum wages and conditions o f work, collective
bargaining and pressure fo r higher wages, social
security legislation—all o f these can be thought
o f simply as a hampering drag upon “ venture
capital.” But they each also have favorable
aspects from the standpoint o f social and individ­
ual welfare, equity, and income maintenance.
Realistically, they are probably here to stay; our
private enterprise system cannot shirk their chal­
lenge. Nor, taking the long view, is it likely that
it can hold the line against their further extension
over future decades.


Fortunately, the trend o f economists’ opinions
over the last two decades does not appear to be
definitely toward the view that the favorable in­
come and purchasing power side o f the wage ques­
tion is overbalanced by the unfavorable investment
effects. But to discuss this further would take us
far afield.
A nticyclical effects o f reserve financing.—Be­
cause o f our stated belief that all reserve funds
should be invested in Government bonds or equiv­
alents, and because it is now definitely unfashion­
able to invest pension funds in the private securi­
ties o f the employing company, we did not feel it
necessary to discuss the problems raised by such
private modes o f financing. High-grade Govern­
ment bonds tend to go to a premium in bad times.
F or this reason, and because the Federal Keserve
authorities have ample powers to stabilize their
marketability, such securities offer the ideal me­
dium for reserve financing.
Professor Slichter expresses concern that guar­
anteed wage reserve funds w ill purchase Gov­
ernment securities at the expense o f the banking
system; in the process excess reserves would be
created; thereby private loan expansion would be
encouraged. This represents an instance o f our
statement (p. 33) that the deflationary impact o f
boom-time reserve accumulation may be partially
offset by an easing o f interest rates and capital
availability. A t worst, this could only be a partial
offset: Partial because interest rates weaken only
in consequence o f a final decline in total income.
Even this partial perversity can be easily offset by
having the Federal Reserve authorities do what
they always should do with respect to actual or
potential excess reserves during inflationary boom
W e cannot wholly acquiesce in Professor
Slichter’s appraisal o f the absence o f deflationary
influences resulting from boom-time reserve ac­
cumulations. The reasoning o f his preceding
paragraph seems to hold that an increase o f cor­

porate saving—for that is precisely what reserve
financing means—is, by itself, an “ expansionary”
factor. In our view it could be so only in the fo l­
lowing inverted sense: A deliberate deflationary
policy which successfully offsets an inflationary
boom-time situation may prolong the duration o f
prosperity and fu ll employment. Only in this
sense, could a “ deflationary” policy be “ expan­
sionary” ; and this does not deny its deflationary
character or differ with the accepted view that re­
serve financing is anticyclical. Moreover, only in
those special boom periods where employment and
purchasing power tend to be “more than fu ll,”
would such a deflationary policy be desirable.
During depressions, replacement expenditures
o f corporations often fa ll below depreciation
charges; they often fall by more than the total o f
corporation losses. Consequently, there is a “ run­
off” on fixed assets which w ill to some degree mod­
erate the need o f the corporation to rely completely
upon previously funded reserves. Guaranteed
wages may also be paid at the expense o f depression
dividends. But as we pointed out (on p. 29), in
the absence o f funded reserves, there may still be
some harmful effects o f guaranteed wage payments
upon the ability o f the firm to maintain some o f its
depression gross investment, and this is in line
with Professor Slichter’s discussion.
Guaranteed wage plans with alternative
limitations.—Professor Clark (p. 53) and Profes­
sor Slichter (p. 60) have each suggested a modi­
fied guaranteed wage plan. There are an infinite
range o f such programs and it is useful to explore
a variety o f possibilities. In our Report we have
suggested the need in many fields o f some lim ita­
tion upon employers’ guaranteed wage liabilities.
In particular our recommendation No. 2 in chapter
V I suggested the advisability o f the type o f lim ita­
tion o f liability developed in Mr. Latimer’s final
report (whereby the liability o f any employer in
a given period is limited to some agreed-upon per­
centage o f his total guaranted pay r o ll).


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