A Rabbit That Could Turn into a Tiger

President Nixon's decision last month to create a National Commission on Productivity brought a skeptical reaction from George Meany, the head of the A.F.L.-C.I.O. "It may increase public education," said Meany, "but I fail to see how it will curb inflation."

Meany was just a bit overcritical. The commission does lack the power to accomplish much over the short term in reducing the pressures that lift prices. But it really aims at long-range solutions to a problem that is close to the root of inflation. The output per man-hour of the U.S. labor force has been sagging for two years; during the first quarter of this year, productivity actually fell at an annual rate of 0.6%. With wages and fringe benefits climbing by 7.7% an hour, labor costs per unit of output rose at an annual rate of 8.4% --the worst performance in 14 years. Companies naturally felt a strong compulsion to raise prices. If the productivity problem becomes chronic, it will in time damage the nation's globally envied standard of living.

Productivity normally slips during the early stages of a business downturn, and most experts reckon that the first-quarter decline is temporary. FORTUNE estimates that output per man-hour rebounded dramatically to register a 1% gain during the second quarter of the year; this is a 4% annual rate of gain, well above the average postwar advance of about 3.3% a year. The rise, however, resulted mostly from increasing layoffs. Unemployment in June fell to 4.7% from 5% the month before--the first dip in eight months--but the decline occurred almost entirely among adult women. The jobless rate among blacks rose from 8% to 8.7%; among black youths the rate is now 34%. Thus when Nixon's commission holds its first meeting later this month, its 23 members will confront a troublesome thicket of economic difficulties.

Meany agreed last week to be one of the commission's six labor members. So did United Auto Workers President George Woodcock, whose wage negotiations with automakers this summer may set a pattern for much of the nation. Six other commission members will represent the public, and another six will be men from business, including leaders of other industries facing key labor bargaining this year. The chairmanship will rotate among the five Government members: Treasury Secretary David Kennedy, Commerce Secretary Maurice Stans, Labor Secretary James Hodgson, Chief Presidential Economist Paul McCracken and George Shultz, the White House's management and budget chief. With a line-up like that, the commission could be able to exercise considerable clout.

The panel will consider ways to temper the inflationary impact of higher wages. By some industry estimates, labor costs account for at least 75% of the price of all U.S. goods. Besides publicizing wage or price increases that seem out of line, the commission will probably delve into the operations of many industries. It will, insists one high-ranking Administration official, be a live and sharp-toothed animal. "It's a rabbit now," he says, "but it could turn into a tiger."

Examining Nuances. Economist Shultz, who originally suggested the commission, hopes for a broader approach to the productivity problem. "People automatically think of featherbedding, but that's just one part of it," he says. The commission, Shultz believes, should also examine the impact of research and development, relations between scientists and Government, and the effects of tax and educational policies. "If you want to do something about pollution, you will have to have growth in productivity to pay for it," he adds. "You need to understand the nuances and limitations. For example, you want to find the disadvantaged and get jobs for them, but that's not the best way to raise output per man-hour."

Much of the nation's economic strength comes from raising productivity in the classic way, by replacing men with machines. The New York Port Authority, for example, uses a mechanical man, dubbed Angelo, to direct traffic around construction on the George Washington Bridge. A single guard at a huge console in the lobby of Manhattan's Pan American Building is able to keep track of elevators and, through a closed-circuit TV, watch all entrances and exits to the building.

The effort to raise productivity is all the more urgent because companies are shifting increasing amounts of their manufacturing abroad to cut costs. The U.S. now imports most of its typewriters, sewing machines and television sets and 98% of its portable radios. Chemicals, textiles and footwear once produced by U.S. workers are increasingly entering the domestic market from countries that have pools of lower-wage labor. Next year all of Ford's small Mavericks will be built in Canada, and Chrysler last week announced that in 1971 it will introduce a Dodge Colt line manufactured in Japan by Mitsubishi. For the first time, an American automaker will offer a Japanese-made car in its showrooms.

Patrolled Heat. Nowhere in the U.S. economy are labor costs running farther ahead of productivity gains than in its largest industry, construction. Wage increases average about 21 % a year, and laborers in Connecticut, Missouri, Florida and Kansas have recently won pay increases of 30% a year. Under new contracts, lathers in Cleveland will earn $ 10.71 an hour by 1972, and cement masons $10.41. Success at the bargaining table seems only to have heightened construction labor's appetite for make-work arrangements. Detroit pipefitters require a "heat-patrol" 24 hours a day, seven days a week when temporary heat is used to permit cold-weather construction, even though the equipment is automatic. Pittsburgh contractors complain that cement finishers have reduced their daily output to 500 or 600 sq. ft. from 700 to 800 sq. ft. a few years ago. If St. Louis contractors use power or lights on a construction project, they must hire a union electrician merely to turn the switches on and off.

Skyrocketing construction costs affect the whole economy, because companies set prices at a level calculated to repay their investment in new factories and offices. The cost of moving goods has a similar impact. Last week Chicago trucking companies agreed to Teamster demands for a $1.65-an-hour pay increase over 36 months, thus upsetting the recent national settlement pattern of $1.10 an hour over 39 months. On the basis of the Chicago settlement, the national increase will now go to $1.85 an hour over 39 months. Truckers, in turn, say they will have to ask for an 8% to 12% boost in freight rates to make up for their higher costs.

Labor's growing militancy reflects the fact that price increases have erased the benefits of higher wages during the past several years. If the nation is to regain its economic balance, it must, as President Nixon says, find "ways of restoring growth to productivity." As a greater proportion of manpower finds its way into services, where productivity gains are difficult to bring about, the need for higher efficiency in industry becomes even more acute. To achieve that efficiency, businessmen may need all the help they can get from the productivity commission.

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