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E C O N O M IC R E V IE W Additional copies of the ECONOMIC REVIEW may be obtained from the Research Department, Federal Reserve Bank of Cleveland, P. O. Box 6387, Cleve land, Ohio 44101. Permission is granted to reproduce any material in this publication providing credit is given. TRENDS IN PRODUCTIVITY, COSTS, AND PRICES Growth in aggregate demand has slowed markedly since the end of 1968 largely in response to restrictive public policies, while gains in productivity have become more d iffic u lt to achieve, and prices have continued to increase at a rapid rate in many sectors of the economy. With demand weakening, it seems apparent that the major sustaining force in the recent inflationary episode has been the influence of cost-push factors, as distinct from the earlier problem of excess demand.1 Frequently, increasing unit labor cost is cited as the prim ary— sometimes the exclusive—determinant of upward cost IN THIS ISSUE pressures. However, such generalizations neglect the in flu ence of Trends in Productivity, Costs, and Prices........... 3 nonlabor costs (or payments to factors of production other than labor). In some industries, non labor costs play a far more important role in the form ulation of price than labor costs. Registered Bank Holding Company A ctivity in Ohio, 1964-1969 .........15 i For a discussion of the concepts of cost-push and demand-pull inflation, see "Inflation: Problems of the 1960'sand Implications for the 1970's,” Econom ic Review, Federal Reserve Bank of Cleveland, February 1970. 3 ECONOMIC REVIEW A crucial aspect of the inflationary process that industry is defined as shipments (or sales) plus the is receiving greater public attention is the behavior change in inventories less that industry's purchases of productivity.2 Increasing recognition is being of materials, intermediate products, and services. given to improved productivity performance as the In manufacturing, fo r example, the dollar value of major offset to rising labor costs. In popular shipments in recent years has been more than discussions of inflation, however, it is not gener twice as large as the dollar value of gross product. ally emphasized that a high productivity growth Gross private product, or the gross product of industry with prices rising at rates slower than in an industry, also can be defined as the summation low productivity growth industries may also be of costs incurred in producing the goods and exerting significant inflationary pressures. This article examines some long-run trends in services: employee compensation (wages, salaries, and all supplements); net interest (interest paid output, productivity, costs, and prices in a number less interest received); capital consumption allow of major industries in the private sector of the ances (depreciation and accidental damage to fixed economy. The discussion emphasizes contrasting business property); indirect business taxes (items trends during the 1964-1969 period, using as such as excise taxes, property taxes, sales taxes, background developments during 1959-1964, a and business transfer payments); and profit-type period generally characterized by relative cost- income (corporate profits after inventory valu price stability. ation adjustment, proprietors' income, and rental CONCEPTS OF OUTPUT, P R O D U C TIV ITY , COST, AND PRICE p ro fit as conventionally defined. Some profit-type As used in this article, output is synonymous with the concept of gross product measured in constant dollars. The measure of output for the economy as a whole is Gross National Product, which is the market value of the goods and services produced by the nation's economy for final sales or for addition to inventories. Gross product originating in the private sector of the economy (roughly 92 percent of constant dollar GNP) consists of GNP less compensation of general government employees. The gross product of an o As evidenced, for example, by the President's recent creation of the National Commission on Productivity. See In fla tio n A le rt, Report to The National Commission on Productivity by the Council of Economic Advisers, August 7, 1970. 3 The reason for this article's exclusion of gross product originating in government is that compensation of general income). The term, profit-type income, is not all income, such as the income of self-employed proprietors, is conceptually the same as employee compensation. For an individual firm , purchases o f materials, supplies, and services from other firms are, of course, true costs of producing a dollar's worth of shipments or sales. Those costs essentially "wash o u t" fo r the economy as a whole. Accordingly, the distribution of total costs by industry division are value-added costs—not costs of producing a dol lar's worth of sales. There is considerable variation in the major cost components among industries. For example, shares of total costs attributable to employee compensa tion range from a low of 14 percent fo r agricul ture, forestry, and fisheries (due to the large share government employees is defined as current dollar output. of self-employed persons in that industry) to a There is no allowance for productivity gains by govern high of 76 percent fo r contract construction, w ith ment employees, and all increases in wage and salary scales are automatically treated as equal increases in unit labor cost and price. Digitized for 4 FRASER 55 percent the average fo r the entire private economy (see Table I). In most industries, net SEPTEMBER 1970 TABLE I Distribution of Total Costs Per Unit of Output By Industry Division 1969 Employee Compensation Net Interest Capital Consumption Allowances Indirect Business Taxes Profit-Type Income 55.3% 14.0 38.5 76.2 69.4 63.4 73.4 69.1 45.1 33.2 53.9 59.7 22.2 63.9 3.7% 9.4 1.3 0.4 1.1 1.2 1.0 4.0 5.2 11.8 1.5 1.7 12.2 2.0 9.5% 21.7 21.1 5.3 7.7 8.1 7.5 14.8 14.6 20.9 4.3 5.3 14.9 6.9 10.7% 8.4 8.3 2.5 6.9 12.2 3.3 7.3 13.1 11.8 26.2 16.4 18.9 2.4 20.8% 46.5 30.8 15.6 14.9 15.1 14.8 4.8 22.0 22.3 14.1 16.9 31,8 24.8 Private Economy Agriculture, forestry, and fisheries Mining Contract construction Manufacturing Nondurable goods Durable goods Transportation Communication Electric, gas, and sanitary services Wholesale trade Retail trade Finance, insurance, and real estate Services Source: U. S. Department of Commerce interest accounts fo r a small portion of total costs. high cost of production in wholesale and retail For those industries, however, that rely heavily on trade and in finance, insurance, and real estate. real The shares of profit-type income, which vary estate; electric, gas, and sanitary services; and borrowed funds (finance, insurance, and widely among the industries, should not be con agriculture, forestry, and fisheries) net interest sidered indicators of relative p rofitability. For accounts fo r a relatively large share of total costs. example, profit-type income ranks very high as a In every industry, the cost of capital consump share of total costs in agriculture, forestry, and tion allowances is a greater share than net interest. fisheries largely because proprietors' income is Among industries that are capital intensive (for included in this component of costs. To a lesser example, agriculture, mining, and electric, gas, and extent, the same is true fo r contract construction, sanitary services), the shares of capital consump where the proprietors' income from many small tion allowances in total costs are more than double unincorporated enterprises is a part of profit-type the average for all industries. In the electric, gas, income. In finance, insurance, and real estate and sanitary services industries, the combined (another industry w ith significantly above average costs of net interest and capital consumption profit-type income), rental income is an important allowances component of profit-type income. are roughly equal to outlays for employee compensation. For the private economy as a whole, indirect Several other terms discussed in this article, specifically productivity and price, should be business taxes account fo r a greater share of total clarified. Productivity is much easier to define costs than capital consumption allowances (see than to measure; it means output (commonly Table I). Indirect business taxes are a relatively measured in physical terms) per some unit of input 5 ECONOMIC REVIEW (usually labor input, although other factors of production such as land and capital—or a combin AN O VER VIEW OF P R O D U C TIV ITY , COSTS, AND PRICES: 1 9 5 9 -1 9 6 9 ation of all three—also can be used). In order to compare productivity trends, given the limitations The annual behavior of the key components of price change in the private economy during of data availability, the concept of gross product 1959-1969 is shown in the chart. The fundamental measured in constant (1958) dollars is used as relationships are as follows: the change in compen output, and the number of full-tim e equivalent sation per employee minus the change in output employees is used as input in this article.4 On that per employee is approximately equal to the change basis, annual rates of change in productivity were in unit labor cost; the weighted summation of computed fo r each major industry division and for changes in unit labor cost, unit nonlabor cost (net the entire private economy. Price trends by industry were based on im plicit price deflators fo r gross product—that is, prices interest, capital indirect business taxes), and consumption allowances, and unit profit-type income equals the change in price. paid by an industry fo r purchased materials and When the increase in compensation per intermediate products were netted out from the employee exceeds the gain in productivity, unit industry's selling In other words, the labor cost w ill increase. For the economy as a price deflators for each industry are whole, and for most industries, the longer the im plicit prices. value-added price indexes, and the weighted sum period mation of those prices is equal to the im plicit price changes in unit labor cost are associated with deflator for the private economy (the weights, of changes in price. In the short run, however, a given under consideration, the more closely course, are each industry's share of constant dollar increase in unit labor cost does not automatically private GIMP).5 cause or contribute to a corresponding increase in price. As a case in point, during the recession year of 1960, the increase in unit labor cost accelerated 4 (from 1.8 percent in 1959 to 2.6 percent in 1960) Both constant dollar gross product and the number of full-time equivalent employees, by industry division, are and u nit nonlabor cost rose sharply (by 5.3 estimated by the U. S. Department of Commerce. Data percent), while the rate of increase in prices in the are published each year in the July issue of Survey o f private economy was the same as it had been in Current Business. 1959—1.4 percent. The reason why the rate of advance in prices was unchanged in 1960, despite ^Implicit price deflators for any particular industry should not be confused with the more commonly known Consumer Price Index or Wholesale Price Index. For example, the implicit price deflator for manufacturing is not the same as the Wholesale Price Index for manufactur accelerated increases in unit labor and unit non labor costs, is that unit profit-type income declined by 4 percent in response to weakened aggregate demand. ing, and the implicit price deflator for retail trade is not During 1961-1965, increases in compensation the same as the Consumer Price Index. Components of per employee were largely offset by gains in both the Consumer Price Index and Wholesale Price Index, together with other price measures, such as trans portation and construction cost indexes, are used to con struct the implicit price deflators. 6 o For both the private economy and each industry, the weights are the shares of total cost listed in Table I. SEPTEMBER 1970 S E L E C T E D E C O N O M I C IN D IC A T O R S, P R IV A T E E C O N O M Y (P er cen t C h a n g e From P re v i o u s Y e a r) P e rc e n t Percent 10 Z O M P E N S A T IO N PER EMPLOYEE 5 1 ■ 1 0 OUTPUT PER EMPLOYEE 5 ■ UNIT LA BOR COST n 0 UNIT N O N L A B O R COS T - 1 ■ 10 Hi HI mm BB n it 10 5 m . ■ ■ ■ _ 10 ■ ■ n 0 n n ■ 0 n n n T 1 .■ 1 10 5 ' 0 UN IT PROFIT-TYPE IN C OME 5 0 n u ■■ _ 1959 Last e n try : '60 n _ U U N IT PRICE — '61 , i '62 — ■ — '63 1969 , '64 — ■ '65 '66 _ i_ ....... ' ' ' ■ ,■ ,I 67 '68 10 5 0 '69 ANNUALLY U. S. D e p a rtm e n t o f Com m erce , S u r v e y o f C u r r e n t B u sin e ss (J u ly 1970, J u ly 1968, and A p r il 1967) and N a t i o n a l In c o m e Sources o f d ata : a n d P r o d u c t A c c o u n t s o f th e U n it e d St a t e s, J 9 2 9 - 1 9 6 5 . C a lc u la tio n s w e re m ade by the F ederal Reserve Bank o f C le ve la n d . productivity. As a result, increases in unit labor longer being offset by gains in productivity. The cost were moderate and, in turn, contributed to upward price pressures stemming from rising unit the relatively small price increases during that labor cost were reinforced by large increases in period. Progressively smaller gains in unit nonlabor unit nonlabor cost in 1967, 1968, and 1969. cost reflected the spreading of certain fixed portions of capital consumption allowances, inter est, and indirect business taxes over larger gains in DEVELOPMENTS IN THE MAJOR INDUSTRIES output. These small gains in unit nonlabor cost, Table II shows the behavior of the major combined w ith moderate changes in unit profit- factors influencing prices during the two periods, type income, also helped to keep price increases 1959-1964 and 1964-1969. Several qualifications relatively small until 1965. In 1965, however, a of the data should be mentioned. In the contract strong income was construction industry, fo r example, price indexes associated w ith a moderate step-up in the rate of are based on costs of labor and materials w ithout price increase (from 1.1 percent in 1964 to 1.7 full allowance for increased efficiency in produc boost in unit profit-type percent in 1965). During 1966-1969, the rate of tion. As a result, increases in the im plicit price inflation continued to advance, partly because deflator for gross product in the contract construc gains in compensation per employee were no tion industry somewhat overstate both the true 7 ECONOMIC REVIEW TABLE II Trends in Major Factors Affecting Price By Industry Divisions 1959-1964 and 1964-1969 Average Annual Change, Compounded Period Output Compensation per Employee Private Economy (100.0% ) 1959-1964 1964-1969 4.2% 4.6 3.9% 5.4 2.9% 1.3 1.0% 4.0 3.4% 3.6 - 0.6% 0.5 1.1% 3.0 Agriculture, forestry, and fisheries (3.7%) 1959-1964 1964-1969 1.1 1.1 4.1 8.9 3.3 6.1 0.7 2.6 3.5 7.2 - 1.9 3.9 0.2 5.0 Mining (2.5%) 1959-1964 1964-1969 2.4 3.1 3.6 5.8 5.1 3.3 - 1 .5 2.3 - 0 .2 0.6 - 0.6 2.3 - 0 .8 0.3 Contract construction (3.6%) 1959-1964 1964-1969 1.2 0.4 4.3 6.3 -0 - 2 .5 4.3 9.0 4.4 7.1 2.8 5.5 4.0 8.3 Manufacturing (34.1% ) 1959-1964 1964-1969 4.6 5.5 3.9 5.0 3.8 2.2 0.1 2.7 2.2 1.1 -0 0.6 0.4 1.9 Nondurable goods (13.5% ) 1959-1964 1964-1969 3.9 4.7 3.6 5.1 3.3 2.5 0.2 2.5 2.1 1.4 -0 0.3 0.7 1.9 Durable goods (20.6% ) 1959-1964 1964-1969 5.1 6.1 4.0 4.8 4.1 2.0 -0 2.7 2.8 1.3 - -0 1.1 0.3 1.9 Transportation (5.2%) 1959-1964 1964-1969 3.4 5.7 3.8 5.6 4.2 3.9 - 0 .3 1.6 2.1 3.2 1.6 -1 1 .0 0.5 1.2 Communication (3.1%) 1959-1964 1964-1969 6.8 9.2 5.0 5.0 6.5 4.7 - 1 .4 0.3 2.9 2.4 - 0.5 4.1 0.4 - 0 .1 Electric, gas, and sanitary services (3.0%) 1959-1964 1964-1969 5.7 5.7 4.6 5.2 5.5 3.9 - 1 .1 1.2 - 0 .2 3.5 - 1.7 5.3 0.4 0.3 Wholesale trade (8.3%) 1959-1964 1964-1969 5.2 5.8 3.8 5.3 3.6 2.5 0.2 2.7 0.7 4.8 - 2.8 2.2 - 0 .1 2.5 Retail trade (10.5% ) 1959-1964 1964-1969 3.3 4.0 3.6 4.4 1.6 - 0 .1 2.0 4.5 4.1 6.9 - 1.3 1.2 1.6 3.9 Finance, insurance, and real estate (14.5%) 1959-1964 1964-1969 5.0 4.3 4.1 5.6 2.6 0.6 1.5 5.1 5.3 4.0 - 2.7 1.4 1.4 3.3 Services (10.3% ) 1959-1964 1964-1969 3.9 4.6 4.4 6.1 0.9 0.3 3.5 5.9 4.9 3.5 1.9 3.0 3.2 4.8 Industry NO TE: The 1969 shares of gross private product, measured in 1958 dollars, are in parentheses. Included in the private economy, but not shown separately, are gross product originating in government enterprises and in the rest of the world; those industries account for 1.2 percent of gross private product. Source: U. S. Department of Commerce Digitized for 8FRASER O utput per Employe Unit Labor Cost Unit Nonlabor Cost U nit Profit-Type Income - Price SEPTEMBER 1970 rate of price increase and the increase in unit labor industries could be higher or lower than those cost, while growth called for in the guideposts if the industry had in output and changes in Similarly, in the services industry, the im plicit insufficient or excess capacity at full employment demand, if costs other than labor had risen or price deflator is widely thought to be biased fallen, and if excess market power of an industry upward resulted in unusually high p ro fit rates.7 productivity are because correspondingly no allowance understated. is made for improved productivity in certain activities, such as household services. As a result, growth in output and productivity is understated, and increases in unit labor cost and price are overstated. TRENDS: 1 9 5 9 -1 9 6 4 The actual performances of key variables in the major Despite these limitations, the data in Table II industries can be analyzed against the background of the concepts underlying the guide- contribute to an understanding of the various posts. industries' contributions to in annual increases in compensation per employee in output arid to changes in productivity, costs, and the private economy exceeded annual gains in overall growth During the 1959-1964 period, average prices. The data also reveal instances where the productivity, on average, by only 1 percent per actual behavior of key variables during the periods year. In view of the possible overstatement of unit under review ran counter to what economic theory labor cost and price in certain industries, the might have suggested. Reference points fo r the moderate average annual increases in unit labor suggested behavior of the variables are the theoret cost and price (1.0 percent and 1.1 percent, ical underpinnings of the wage-price guideposts that were promoted by the President's Council of respectively) were tolerable rates of change. Among the individual industries, productivity Economic Advisers in the early 1960's. gains varied widely—from no measured change in These guideposts for noninflationary wage and contract construction to a 6.5 percent annual rate price behavior call fo r annual increases in wages of increase in the communication industry. Aver and all fringe benefits per manhour in each age annual gains in compensation per employee, industry to be equal to the trend rate of increase on the other hand, fell w ithin a relatively narrow in productivity in the private economy (the trend range—from 3.6 percent in mining, nondurable was meant to include a period of three or more goods years). Industries with above average productivity percent in communication (see Table II). With gains were expected to reduce prices, while indus respect to output patterns, increases in compensa tries w ith below average productivity gains would tion per employee in eight out of the 12 industries be justified in raising prices; average productivity were in accordance w ith what might have been manufacturing, and retail trade to 5.0 gains called fo r stable prices. As exceptions to the rule, it was recognized that the faster growing industries might be required to grant above average wage increases to attract the labor resources needed for expansion ^or if wage levels were exceptionally low, larger wage increases might be necessary). In addition, price trends in certain Although the guideposts have not been promoted in recent years, their underlying concepts are mentioned here as a backdrop for evaluating economic developments in the major industries. See Econom ic R eport o f the President, together with the A n n u a l Report o f the Council o f Econom ic Advisers, 1962, 1963, 1964, 1965, and 1966. 9 ECONOMIC REVIEW expected (considering nondurable goods manufac turing and durable goods manufacturing as two TRENDS: 1 9 6 4 -1 9 6 9 During the 1964-1969 period, productivity separate industries). In other words, four industries performance deteriorated in all industries, except that experienced below average growth in output agriculture (see Table II). A t the same time, the also had below average gains in compensation per rate of increase in compensation per employee employee, while four industries w ith above average accelerated in all industries except communica growth in output had above average gains in tion. In contrast to the narrow spread of increases compensation per employee.8 between 1959 and 1964, average annual gains in From 1959 to 1964, the performance of unit compensation per employee during 1964-1969 nonlabor cost was more adverse than unit labor ranged from 4.4 percent in retail trade to 8.9 cost in every industry. That is, unit nonlabor cost percent in agriculture. either rose at a faster rate than unit labor cost or declined at a slower rate. In transportation and Unlike the 1959-1964 period, the relationships communication, declines in unit labor cost were between growth rates in output and compensation more than offset by gains in unit nonlabor cost. per employee generally were not as might be Manufacturing and wholesale trade experienced expected. moderate increases in unit labor cost that were of association was negative rather than positive. Four similar proportions; however, prices moved in industries w ith below average growth in output different directions in these two industries largely had above average growth in compensation per because of dissimilar changes in unit nonlabor employee, and five industries w ith above average cost. growth in output had below average increases in A fter the 1957-1958 recession, unit profits in In nine out o f 12 industries, the compensation per employee. industries, except agriculture, mining, and In every industry, gains in compensation per contract construction recovered sharply in 1959. employee far exceeded the sharply reduced rate of Average annual rates of change in unit profit-type growth in productivity in the private economy as a all income generally were moderate between 1959 whole. Only the very rapidly growing communica and 1964. Perhaps the most significant set of relationships tion during the 1959-1964 period is that all eight increases in compensation per employee w ithin industries w ith above average increases in produc reasonable tiv ity had below average price increases (or price improvement. Between the 1959-1964 period and declines in the case of mining and wholesale the trade). The four industries w ith below average accelerated productivity performance, as might be expected, instances, downward trends in unit labor cost industry—telephone and telegraph, radio broadcasting, and television—managed to keep bounds 1964-1969 of its own productivity period, each industry had an rise in unit labor cost; in some had above average price increases. In contract during the earlier period were displaced by upward construction and services, the rate of price increase trends in the later period. The recent behavior of was three to four times above average. unit labor cost was particularly poor in four o industries: contract construction; services; finance, These developments, together with others to be cited, are summarized in Table III. 10 insurance, and real estate; and retail trade. SEPTEMBER 1970 Most industries also incurred larger increases (or less favorable changes) in unit nonlabor cost pronounced upswing in unit cost of net interest and capital consumption allowances. between 1964 and 1969. As exceptions to the In the private economy as a whole, unit general pattern, the manufacturing; communica profit-type income improved on balance between tion; and finance, insurance, and real estate indus 1964 and 1969 (despite declines in 1967 and tries improved their unit nonlabor cost perfor 1969). mance relative to the earlier five-year period. The however, was the unit p ro fit performance in six Running counter to the general trend, industries sustaining the greatest acceleration in industries that collectively account for almost half unit nonlabor cost increases were agriculture; of gross private product (mining, durable goods contract construction; electric, gas, and sanitary manufacturing, services; and wholesale and retail trade. and wholesale and retail trade). Although the transportation, communication, growth rate of output in those industries increased In agriculture, the stepped up increase in unit between the two periods, unit profit-type income nonlabor cost during the 1964-1969 period was failed to improve or actually worsened. Only two due prim arily to a surge in unit cost of capital industries, nondurable goods manufacturing and consumption allowances and, to a lesser extent, services, managed to improve both their growth higher unit cost of indirect business taxes. In rates in output and their unit p ro fit performances contract construction, all of the accelerated rise in between the two periods. The remaining industries unit nonlabor cost was due to a substantial (agriculture; contract construction; electric, gas, increase in the unit cost of capital consumption and sanitary services; and finance, insurance, and allowances (from an average annual gain of 1.7 real percent between 1959 and 1964 to an average declines in their growth rates in output, but estate) experienced no improvement or annual gain of 8.5 percent during the most recent nevertheless improved their unit p ro fit perfor five years). In trade, particularly wholesale trade, a mance. marked increase in unit cost of indirect business taxes largely contributed to the accelerated rises in unit nonlabor cost. Special mention should be made regarding wholesale trade, where the annual INDUSTRY CO NTRIBUTIONS TO RECENT IN FLA TIO N Price increases accelerated in practically all rate of increase in unit cost of indirect business industries during the recent five-year period; only taxes more than quadrupled between the two communication and electric, gas, and sanitary periods under review (from 1.0 percent between services registered an improvement relative to the 1959 and 1964 to 4.4 percent between 1964 and earlier five-year period. As might be expected, 1969). As a result, by 1969, indirect business taxes industries w ith above average productivity gains accounted fo r more than one-fourth of the total had cost of gross product in wholesale trade. In the agriculture), and all industries w ith below average capital intensive electric, gas, and sanitary services productivity performance had above average price below average price performance (except industry, which had declining unit nonlabor cost increases (see Table III). One particular problem between 1959 and 1964, the relatively steep rise in area stems from the agricultural industry, where unit nonlabor cost during 1964-1969 reflected a prices rose only about one-sixth as much as in the 11 ECONOMIC REVIEW TABLE III Ranking of Industrial Trends in Output, Compensation Per Employee, Productivity, and Price (With Respect to Average Changes in Private Economy) 1959-1964 and 1964-1969 Compensation per Employee Output Industry Agriculture, forestry, and fisheries Mining Contract construction Manufacturing Nondurable goods Durable goods Transportation Communication Electric, gas, and sanitary services Wholesale trade Retail trade Finance, insurance, and real estate Services 19591964 19641969 — — — + — + + + + + — — + + + + + + + — A Output per Employee 19591964 19641969 19591964 19641969 + + A — + + + — + + + + + — — + — — + + + + — + + + + + + + — — + + — + + + + + + + — Price 19591964 — + — — — — — + + + 19641969 + + — — — — — + + + NOTE: Plus signs indicate above-average changes; minus signs indicate belowaverage changes; and A signifies average change. Source: U. S. Department of Commerce private economy between 1959 and 1964, but increase in manufacturing, fo r example, more than then rose two-thirds faster during the following quadrupled five years (reflecting the fact that the industry's responsible was the durable goods industry, which selling prices—determined in the short run much sustained a greater cutback in productivity growth more between the two periods. Largely than and a more severe increase in unit labor cost than demand—rose faster than its buying prices). The other four problem industries w ith above the nondurable goods industry. Moderate price average rates of price increase (contract construc ted to the low rate of price increase during the by conditions of supply rather declines in the wholesale trade industry contribu tion; services; retail trade; and finance, insurance, 1959-1964 period, but the situation was reversed and real estate) all have been consistently charac during the following five years, when wholesale terized by low productivity growth, and their trade incurred relatively large price increases. A impact on the overall rate of inflation in the less pronounced price reversal also occurred in the private economy is clearly evident from an inspec mining industry. tion of the data in Table II. Other industries w ith below average rates of price increase, however, also contributed CONCLUDING COMMENTS to the nearly trebled rate of It is impossible to distinguish between cause inflation in the private economy between the two and effect in examining aggregative sets of indus five-year periods under review. The rate of price try data relating to price. The blame for the Digitized for12 FRASER S E PT E M B E R 1970 Trends in Wages and Salaries Per Employee and Supplements Per Employee, 1959-1969 Average Annual Percent Change, 1969 Compounded Wages and Salaries Per Employee 196419591964 1969 Private economy Agriculture, forestry, and fisheries Mining Contract construction Manufacturing Nondurable goods Durable goods Transportation Communication Electric, gas, and sanitary services Wholesale and retail trade Finance, insurance, and real estate Services 3.6% 3.8 3.4 4.0 3.5 3.3 3.6 3.6 4.6 4.2 3.4 3.7 4.2 5.1% 8.6 5.7 6.4 4.6 4.8 4.4 5.3 4.5 5.0 4.4 5.4 5.9 Supplements Per Employee 196419591964 1969 7.5% 14.3 5.2 8.5 7.6 6.6 8.1 6.0 8.8 7.2 7.8 8.5 9.9 7.8% 15.6 7.2 5.4 7.5 7.5 7.3 8.1 8.6 6.4 8.3 7.7 10.9 Wages and Salaries Per Employee Supplements As a Percent of Total Compensation $7,074 2,894 8,587 8,628 7,768 6,977 8,319 9,293 8,032 9,016 6,523 7,596 5,495 10.0% 6.0 11.0 8.0 12.4 11.7 12.8 10.7 13.4 13.5 7.5 11.9 6.1 Source: U. S. Department of Commerce accelerated pace of inflation in recent years should cited for certain industries d o 'n o t cause inflation, not fall on any particular industry, although it but instead are the effect of a more rapid rate of does seem clear that inflationary pressures have advance in prices. A t any rate, it is hoped that this stemmed more forcefully from some industries article has contributed to a better understanding than others. By the same token, caution should be of the relationships between growth in output, exercised before pinning the burden of inflation employee compensation, and productivity, and the on any particular type of cost. As a case in point, interaction of changes in the major components of the recent increases in unit interest cost that were unit costs in the determination of price. APPENDIX The previous discussion of trends in compensa during the past decade (see Appendix table). By tion per employee made no attempt to distinguish 1969, supplements accounted fo r 10 percent of between wages and salaries per employee and total employee compensation in the private econ supplements per employee. From the standpoint omy, and fo r more than 13 percent in several of an employer, and fo r the economy as a whole, a industries. dollar "paid” to an employee for supplements is just as much a part of total cost as is a dollar paid for wages and salaries. In It is noteworthy that in the agriculture, fo r estry, and fisheries industry both wages and salaries supplements per employee and per most industries, supplements grew at a employee grew at the fastest rates among all consistently faster rate that wages and salaries industries in recent years; nevertheless, both the 13 ECONOMIC REVIEW average wage level per full-tim e equivalent wages and salaries rather than in supplements. (In employee and supplements as a percent of total the contract construction industry, supplements compensation were still considerably below aver accounted age in 1969. The services industry is also character employee compensation between 1959 and 1964, ized by a low wage level and low supplements, but only 7.3 percent of the gain during the despite growth rates consistently above average in following five years.) Unlike contract construc both wages and supplements. tion, the other four industries experiencing an fo r 13.1 percent of the gain in easing in the rate of increase in supplements during Some industries experienced slower rates of the recent five-year period (durable goods manu increase in supplements per employee between the facturing; communication; electric, gas, and sani two periods, 1959 to 1964 and 1964 to 1969. The tary services; and finance, insurance, and real largest reduction occurred in the contract con estate) each continued to have supplements grow struction industry. In recent years, construction ing at a faster rate than wages and salaries, and in workers apparently have elected to receive a larger 1969 each had above average shares of supple share of their gains in compensation in the form of ments in employee compensation. Digitized for 14 FRASER SEPTEMBER 1970 REGISTERED BANK HOLDING COMPANY ACTIVITY IN OHIO, 1964-1969 Before 1964, there were only two registered not include governmental corporations, partner bank holding companies in Ohio. One of the ships, and individuals. Bank holding companies registered bank holding companies was formed in may not acquire nonbanking companies except in 1929 and held 22 banks concentrated in the certain limited circumstances where the activities counties of the company to be acquired are closely related surrounding Columbus. The other registered bank holding company was formed in Clark County in the late 1950's to broaden to the business of banking. To date, most registered bank holding com banking services fo r a mutual savings bank. Since panies in Ohio were formed by large banks located 1964, six registered bank holding companies have in metropolitan areas that wish to expand their been formed in Ohio and their affiliated banks are operations. The bank that initiates the form ation located in most areas in the state.1 The holding of the bank holding company is customarily company headquartered in Clark County discon referred to as the “ lead bank." In most cases, tinued management o f the lead bank forms a corporation its operations in 1965, and all o f its affiliates, which were located in Clark County, and offers a proposal to the bank's stockholders were merged into one commercial bank. There whereby they may exchange the shares they hold fore, this registered bank holding company was of the bank fo r shares in the new corporation. removed from the data for the years after 1964. The term registered bank holding company Once this exchange is consummated, management of the newly formed corporation seeks to acquire refers to any company that directly or indirectly the stock of an additional bank or banks. A fter an owns, controls, or holds w ith power to vote 25 agreement is reached w ith the bank to be acquired, percent or more of the voting shares of two or o more banks. Such a company may be any the lead bank submits an application to the Board corporation, business trust or association, but does of Governors of the Federal Reserve System for prior approval to complete the transaction. In other cases, the corporation is formed, but no 1One of the six new holding companies was formed in 1970 and is excluded from data used in this article. 2 action is taken to acquire shares of the lead bank until an agreement is reached w ith another bank to This bank was subsequently acquired by another bank holding company in 1967. join the initiating bank in forming a registered 3 cation is submitted to the Board of Governors for In general, shares held or controlled in a fiduciary capacity by a bank are excluded. bank holding company. In such a case, an appli prior approval for the corporation to acquire both 15 ECONOMIC REVIEW simultaneously. According to the Bank Holding company refers only to registered bank holding Company Act, the Board of Governors has sole companies. authority for approving or disapproving requests for Growth of Holding Company Influence in the formation of registered bank holding Ohio. As mentioned earlier, there were two regis companies and subsequent acquisitions. Banks that tered bank holding companies operating in Ohio at are owned by bank holding companies are ordi yearend 1964. Together these two holding com narily referred to as bank holding company a ffil panies controlled 24 commercial banks and oper iates. ated 51 branch offices. These 75 banking offices Although the Board of Governors applies the accounted for 5.3 percent of the banking offices in provisions of The Bank Holding Company Act of Ohio at yearend 1964. Between 1964 and 1969, 1956 in approving the proposed transaction, the five Department of Justice has 30 days in which to formed.6 During the period under review, only registered bank holding companies were bring suit to prevent the acquisition or formation three of the newly formed bank holding com should antitrust laws appear to be violated.4 The panies proceeded to acquire one or more commer holding company may not proceed to acquire the cial banking affiliates. There were 18 additional bank during this 30-day period. Recently, the phrase one-bank holding com banks that became holding company affiliates in the 1964-1969 period as a result of holding pany has become more prominent. Any company company acquisitions and formations, compared that owns or controls only one bank is referred to w ith 24 banks in the 35-year period from 1929 to as a one-bank holding company. One-bank holding 1964 (see table).7 companies are not subject to the control or The increase in the number of banking offices regulation of present bank holding company legis operated by affiliates of bank holding companies lation or the Board o f Governors.5 Therefore, was much greater than the gain in the number of their acquisition opportunities and operations are banks during the period. To a large extent, the not limited to only bank related functions, and sizable increase in banking offices controlled by they may enter into activities that are not open to bank holding companies was due to the fact that registered bank holding companies or independent the lead bank generally had a large number of banks. The banking affiliate of a one-bank holding branch offices. The number o f banking offices company is, however, subject to the same banking under the control of bank holding companies rose legislation and regulation as any other commercial from 75 offices in 1964 to 216 at yearend 1969. bank. As a result of the gain o f 141 offices,the share of In this article, the term bank holding 4 The Sherman Act and The Clayton Act are normally cited in cases brought by the Justice Department. banking offices in the state under the control of bank holding companies increased from 5.3 per cent in 1964 to 12.5 percent in 1969. With the ^The U. S. Congress is presently considering legislation which would bring one-bank holding companies under some form of Federal regulation. For a discussion of this proposed legislation, see "Pending Federal Legislation Concerning One-Bank Holding Companies," Econom ic Com mentary, Federal Reserve Bank of Cleveland, August 31, 1970. Digitized for 16 FRASER A net addition of only four after allowing for elimi nation of one of the prior existing holding companies via merger of affiliates in 1965. ^Includes three banks acquired by holding companies in January 1970 that were approved for acquisition in 1969. SEPTEMBER 1970 Total Banking Offices, Deposits and Loans of Registered Bank Holding Companies in Ohio 1964-1969 1964 Number of Companies 1966 1965* 1968t 1967 1969$ 2 2 2 3 4 24 51 75 5.3% 25 74 99 6.6% 26 80 106 6.9% 29 107 136 8.5% 31 136 167 10.1% 39 177 216 12.5% 791.5 5.7% $ 1,413.6 9.3% $ 1,531.5 9.5% $ 2,181.4 12.2% $ 2,807.7 14.5% $ 3,439.8 17.5% 6 Banking Offices Banks Branches Total Total as percent of State total Total Deposits! Held by bank holding companies (thous. of $) Percent of State total $ Gross Loans § Held by bank holding companies (thous. of $) Percent of State total $ 405.4 5.2% $ 811.3 9.5% $ 955.7 10.2% $ 1,237.8 1 2.6% $ 1,619.9 14.6% $ 2,153.6 1 7.6% 532 1,069 1,601 $17,865.6 $ 9,860.5 526 1,130 1,656 $19,371.6 $11,069.9 522 1,211 1,733 $19,699.4 $12,220.6 State Totals Banks Branches Banking Offices Deposits (thous. of $) Loans § (thous. of $) 549 873 1,422 $13,820.5 $ 7,750.8 543 948 1,491 $15,136.5 $ 8,564.5 538 1,009 1,547 $16,126.1 $ 9,408.9 * One holding company went out of existence, but a new one was formed, t One affiliated bank merged with another affiliated bank. t Included in 1969 data are three banks acquired by existing registered bank holding companies which were approved in 1969 but were not actually acquired until January 1970. § Excludes hypothecated deposits. Sources: Federal Deposit Insurance Corporation; Federal Reserve Bulletin-, Federal Reserve Bank of Cleveland exception o f 1966, the annual increase in the volume of loans outstanding at bank holding number of banking offices under the control of companies (see table). These gains in deposits and bank holding companies exceeded that of the loans principally reflect the large size of the lead previous year (see table). banks in the holding companies formed during this The volume of deposits and loans accounted for period. In general, the lead banks of bank holding by bank holding companies increased even more companies were among the state's largest banks in rapidly than the number of banking offices. From terms of deposits and loans. yearend 1964 to yearend 1969, deposits of bank Geographic Location o f Holding Companies. In holding companies grew fro m .$791.5 m illion to general, in Ohio, a commercial bank may branch $3,439.8 m illion, increasing from 5.7 percent to only throughout the county in which it is head 17.5 percent of deposits held by all banks in the state. Similarly, there was a marked increase in the quartered. A bank holding company, however, can acquire affiliates anywhere in Ohio. 17 ECONOMIC REVIEW 18 SEPTEMBER 1970 A t yearend 1964, there were affiliates of bank Affiliated banks in nine counties accounted for holding companies in 20 of Ohio's 88 counties. By between 25 percent and 50 percent of the deposits yearend 1969, affiliated banks were located in 31 counties, w ith six of these counties added in 1969 in their county. Of the eight counties where bank holding company affiliates held more than 50 alone (see Map 1). percent of the deposits, affiliates held up to 75 Twelve of the 39 banks affiliated w ith bank percent of the deposits in five counties; in one holding companies at yearend 1969 were the county holding company affiliates accounted for largest banks in 75 percent to 90 percent o f the deposits; and in their respective home office counties in terms o f deposits, and 14 were the two counties, affiliates held more than 90 percent. largest in terms o f loans. A t yearend 1964, nine The concentration in loans held by bank holding affiliated banks were the largest banks in their company affiliates was essentailly the same as that respective home office counties in terms of de in deposits (see Map 3). posits, and 10 were the largest in terms o f loans. However, the lead bank of the five new bank Since there were 39 banks affiliated w ith bank holding companies formed since 1964 was not the holding companies in 31 counties, some counties largest bank in its home office county in terms of had more than one bank affiliated w ith a bank loans or deposits when the holding company was holding company. Five counties had more than formed. Thus, the increase in the number of one affiliated bank and included the three in affiliates that are the largest bank in the county which 75 percent or more o f deposits are under represents acquisitions of banks that were the the control of holding companies (see Map 4). In largest bank in their county rather than the size of each of these five counties, the largest bank in the lead bank. A fter excluding the five lead banks, both deposits and loans is a holding company five of the 13 banks that have become affiliates affiliate. since 1964 were the largest banks in terms of both Four of Ohio's six registered bank holding deposits and loans in their counties at the time of companies are headquartered in Columbus, Ohio acquisition. In 1969 alone, three o f the eight (Franklin County). However, one does not have an banks that were acquired were the largest banks in affiliate in Franklin County, while one other has their counties in terms of both deposits and loans. two affiliated banks in Columbus. This is the only One affiliated bank became the largest bank in area in the state where a single holding company its county in terms of deposits, and three became has more than one bank in a single county. As a the largest banks in terms of loans. Two affiliated result, Franklin County has four banks affiliated banks that had been the largest in their counties in w ith bank holding companies, the most for any terms of deposits and three affiliated banks that county in the state. had been the largest in terms of loans fell from that position during the 1964-1969 period. Ross County has three banks affiliated w ith registered bank holding companies, although these A t yearend 1969, bank holding company a ffil three banks as a group control less than 75 percent iates accounted for less than 25 percent of the of deposits and loans at banks in the county. deposits at banks in 14 of the 31 counties in which Coshocton County has only tw o commercial banks bank holding companies own banks (see Map 2). and both are owned by holding companies. Clark 19 ECONOMIC REVIEW Map 2. SHARE of DEPOSITS ACCOUNTED for by REGISTERED BANK HOLDING C O M P A N Y AFFILIATES by COUNTY as of JUNE 30, 1 9 6 9 * ASHTA BULA LU C AS FU LT O N W IL L IA M s l GEAUGA OTTAW A CUYAHOGA W OOD SANDUSKY PO R T A G E IR ON P A U L D IN G PUTNAM M A H O N IN G HANCOCK ASH _ | CR AW V A N W ER T [W Y A N D O T FO R D A LLE N R IC H [l a n d W AYNE C O L U M B IA N A LA N D H A R D IN H O LM ES A U G L A IZ E M OR ROW TUSCARAW AS C AR R O LL KNOX iSH ELBY j D ELA W A RE C H A M P A IG N L IC K IN G B E LM O N T ;r a n k i C LA RK - M U S K IN G U M ' N O BLE MONT ~ G O M ER Y M A D IS O N P ICK AW AY W A S H IN G T O N FAYETTE. BU TLE R W ARREN M O N RO E [M O R G A N H O C K IN G ' C L IN T O N ATHENS V iN T O N H A M IL T O N (C L E R MONT 'B RO W N ADAM S SC IO TO Less than 25% .LAW R E N C E 25% - 49.9% 50% - 74.9% m 75% - 89.9% □ 90% - 100% *Less So u rce : h y p o th e c a te d d eposits. F e d e ra l R e s e rv e B an k o f C le v e la n d Digitized for20 FRASER □ □ SEPTEMBER 1970 M ap 3. SHARE of LOANS ACCOUNTED for by REGISTERED BANK HOLDING C O M P A N Y AFFILIATES by COUNTY as of JUNE 30, 1969 * ASHTA BU LA FULTO N W IL L IA M S OTTAW A: TR UM BU LL CUYAHOGA W OOD SANDUSKY LO R A II SUM HURON PUTNAM M A H O N IN G HANCOCK ASH _ | [l a n d CR AW V A N W ER T W AYNE C O L U M B IA N A IY A N D O T FO R D A LLE N H A R D IN M A R IO N H O LM ES MOR ROW LO G AN TUSCARAW AS KN O X IS H E LB Y CO SH O C TO N DARKE D ELA W A RE C H A M P A IG N BE LM O N T R A N K L IN M U S K IN G U M NOBLE MONT “ GOMER' M A D IS O N PICK AW AY MONROE Im o r g a n W A S H IN G T O N W ARREN H O C KIN G ; C L IN T O N ATHENS V IN T O N HAM I L t d I ig h l a n d JAC KS O N BROW N GA LLI ADAM S Less than 25% -AW RENC E 25% - 49.9% 50% - 74.9% 75% - 89.9% 90% - 100% *Less h yp o th e cated deposits. So u rce : F e d e r a l R e se rve Bank of C le v e la n d 21 ECONOMIC REVIEW 22 http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis SEPTEMBER 1970 and Fayette Counties also have two banks a ffil iated w ith bank holding companies. acquisitions are approved, holding companies w ill have the authority to operate banking offices in 16 additional counties. This would bring the number Registered Bank Holding Company Activity in of counties in which holding company affiliates 1970. The Board o f Governors has approved the are permitted to have offices to 47, or more than form ation of a seventh registered bank holding half of the counties in Ohio. company in Ohio. In addition, another large bank in the state has announced its intention to become CONCLUDING COMMENTS the lead bank of a proposed eighth bank holding Registered bank holding company formations company in the state. Furthermore, as of August and acquisitions have increased sharply, especially 1970, since 1966. In a period of approximately three existing bank holding companies have received approval to acquire ten banks in the state, years, from mid-1967 to August 1970, the number have applications pending to acquire two banks, of registered bank holding companies rose from and have announced intentions to acquire five two to seven, w ith intentions already announced additional banks. These holding company forma to form an eighth. During this three-year period, tions and acquisitions could increase the number the potential net gain in holding company a ffil of bank holding companies in the state to eight iates amounts to 34 banks. Registered bank and the number of holding company bank a ffil holding companies control more than 10 percent iates to 60. of the banks in Ohio and more than 20 percent of Thus far in 1970, seven of the 21 actual or the loans and deposits at banks in the state. proposed bank acquisitions are the largest banks in Nevertheless, the bank holding company move their home office county. If all of the proposed ment in Ohio is still in the early stages. 23
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