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Indirect price increases and real wages during world war II
EXPLORATIONS
IN ECONOMIC
Indirect
HISTORY
15,
407-420 (1978)
Price Increases and Real Wages during World War II HUGH
ROCKOFF
Rutgers College
1. INTRODUCTION
The published consumer price index was remarkably stable during World War II, rising only about 3.3% per year between 1942 and 1945. Changes in nominal wages more than offset these increases, but in the postwar period prices increased more rapidly, and real wages fell. Table 1 shows the Bureau of Labor Statistics’ series on prices and real wages during this decade. Hourly real wages reached a peak in 1944 that was not surpassed until 1949, and the 1944 peak in weekly real wages was surpassed even later. The picture is essentially the same if one examines prices and real wages at key transition dates (part B). Hourly real wages rose after President Roosevelt’s Hold-the-Line order, which ushered in a period of stringent control, and then fell during the postwar inflation. The picture with respect to weekly wages is not so clear since this index fell during the period of stringent control, but it fell still further in the postwar period. It has been suggested, however, that this picture is misleading because the wartime price index fails to fully reflect various indirect price increases. The list of potential indirect increases is imposing: quality deterioration, elimination of sales, black market transactions, tie-in sales, rationing and shortages, etc.’ During the War organized labor was the strongest critic of the price index.2 Upset by the use of the index as a standard for wage changes, the so-called “Little Steel” formula, labor charged that the index was grossly biassed downward. The Bureau of Labor Statistics responded by requesting the American Statistical Association to investigate the index. The resulting report (Mills, 1943, 1944) acknowledged that there was a downward bias in the index but judged it to be small. President Roosevelt also responded to Labor’s criticism of the index. The Committee which he appointed requested a group of experts headed by Wesley C. Mitchell and including Simon Kuznets and Margaret G. Reid to undertake a detailed investigation of the index. The Mitchell Committee (1945), which had the largely qualitative findings of the Mills Committee in hand, went further by 1 Opinions can be found on both sides. Friedman and Schwartz (1963, p. 558) argue that unmeasured increases were significant, while Galbraith (1975, pp. 242-243) argues the opposite. 2 The report by Meany and Thomas (1944) summarizes Labor’s criticism of the index. A detailed account of the whole controversy is given in Amow (1951). 407
0014-4983/78/0154-0407$02.00/0 Copyright 0 1978 by Academic Press, Inc. Au tights of reproduction in my form reserved
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HUGH ROCKOFF
quantifying the potential bias. While the Mitchell Committee found serious problems in some component indexes, their conclusion was that overall the error was small. The Bureau followed the recommendations of the Mitchell Committee. It changed the name of the index from “cost of living,” as it was then known, to “consumer price.” And it ran a footnote to the index describing the problems posed by indirect price increases and citing the Mitchell TABLE
I
Consumer Prices and Real Wages, 1940- 1950
Year or date
Consumer Price Index (1935-1939 = loo)
Hourly
Weekly
.66 .69 .73 .78 .81 .80 .78 .78 .79 .82 .85
25.15 28.12 31.43 34.87 36.66 34.52 31.41 31.31 31.50 32.27 34.51
98.6
.65
24.95
100.8
.68
27.52
125.1
.76
34.55
133.3
.81
32.49
174.5
.77
30.99
A Annual averages 100.2 105.2 116.6 123.7 125.7 128.6 139.5 159.6 171.9 170.2 171.9
1940 1941 1942 1943 1944 1945 1946 1947 1948 1949 1950
Real wage in manufacturing ($)
B Important dates August 1939 (beginning of World War II) January 1941 (beginning of the Little Steel Period) May 1943 (1 month after the Hold-theLine Order) June 1946 (price controls suspended) August 1948 (price peak) Sources:
Various issues of the Monthly
Labor
Revim,.
INDIRECT
PRICE INCREASES
WORLD WAR II
409
Committee’s estimate of the bias. In this it was following the Committee’s thinking that inspired guesses about the extent of the error should not be incorporated in the index. To do so would have left the Bureau open to charges that it was “tampering” with the index. In my judgment the report of the Mitchell Committee contains the best available evidence on the extent of indirect price increases, and their effect on the index, during the early part of the War. Nevertheless, the purpose of this paper is to re-open the issue. Due to constraints on its time and purpose, the estimates of the Mitchell Committee cannot be taken as the maximum necessary to make the wartime index appropriate for comparing real wages before and after the termination of controls. In the following sections I review these contraints and, where feasible, estimate corrections. It is important to emphasize that this paper is not intended as a criticism of the Mitchell Committee’s report, but rather as a warning against the uncritical use of its findings. Indeed, an appropriate subtitle might be “The Findings of the Mitchell Committee in Historical Perspective.” Moreover, the adjustments proposed are correct only when the index is being used to deflate nominal wages. For other purposes, for example, for evaluating the performance of the Office of Price Administration, other adjustments might be better. 2. THE FINDINGS OF THE MITCHELL COMMITTEE
The structure of the Mitchell Committee’s estimate of the error in the consumer price index is shown in Table 2. When these estimates are comTABLE
2
The Mitchell Committee’s Estimate of the Potential Errors in the Consumer Price Index, December 1943’ Source of error Component index Food Clothing House furnishings Rent Fuel, electricity, and ice Miscellaneous
Quality deterioration cm 1-3 4-5 7-9 0 0 0
Elimination of sales Pm .5 1 1 0 0 0
Forced uptrading VW
Under reporting (%I
0 0 l-2 0
.5-l 0 0 0
0 0
0 0
Miscellaneous (%I 0 0 0 1.51 0 0
Source: Mitchell (1945), pp. 316, 337, 355, and 365-369. a The Committee also estimated the bias that would be created by an attempt to apply the index to all workers, rather than those living in urban centers (.4). b New Unit bias (1) and rooming rent bias (.5).
410
HUGH
ROCKOFF
bined a total error of 2 to 3.2% results (line 1 of Table 4). The Bureau’s procedures overcame some of the difficulties posed by indirect price increases. For example, it priced items of given specifications so that the mere decline in a particular model would not effect the index. Nevertheless, the Committee agreed with the critics of the index that some changes had produced a downward bias. The Committee tried to set upper bounds on this bias by relying on a wide variety of supplementary evidence and its own knowledge of the market place. For a full description of the Committee’s methods the reader must turn to their report, but it will be useful for what follows to briefly describe the sources of error. Quality deterioration took many forms. In foods it was particularly ingenious: Candy bars shrank, fat was added to hamburger, roasted cereal was added to coffee, cornstarch was added to spices, and the butterfat content of ice cream was reduced without a corresponding reduction in price (Rothwell, 1945, p. 32). Since the Bureau priced at regular intervals, it often missed sales. The elimination of sales and discounts, a product of wartime price and wage controls and strong demand, was, therefore, a burden on those consumers who had availed themselves of these opportunities before the War which was not measured by the Bureau. The Committee, incidentally, estimated the effect of the elimination of weekend food sales, but took no notice of the elimination of end-of-day sales, a factor emphasized later by Kruskal and Telser (1960). Forced uptrading referred to the elimination of lower-priced lines of merchandise. The difference between what consumers would have been willing to pay voluntarily for a higher-quality item and what they were forced to pay because the cheaper alternative disappeared was in effect a price increase. Some uptrading was measured by the Bureau; when they were forced to price a more expensive item they counted one-half of the price differential as an increase. Except in the case of the house furnishings index, the Committee rejected claims that the Bureau’s adjustment for forced uptrading was insufficient. Perhaps as interesting as the sources of error examined by the Committee are those which they largely ignored. One might well ask, for example, why the Committee found so little evidence of black market activity, even though the classical discussion of the black market, Clinard (1952), argues that such activity was widespread. I can suggest two considerations that partially reconcile these positions: First, the Committee’s report came before a number of the more conspicuous black markets, for example, the postwar market in new cars; second, my impression is that many of the items traded on black markets were “luxury” items, such as the better cuts of meats, rather than the ordinary sort which entered the worker’s market basket being priced by the Bureau. The latter consideration may also explain why the Committee failed to consider the effects of an increased volume of tie-in sales.
INDIRECT
3. THE TIMING
PRICE INCREASES
WORLD WAR II
OF THE COMMITTEE’S
411
ESTIMATE
A major difficulty encountered in using the Committee’s estimate is that it came relatively early in the control period. The estimate covers the period January 1941 to December 1943, but during much of this period controls were relatively lax. The end of the Committee’s period occurs only 8 months after Roosevelt’s Hold-the-Line order. This policy remained undisturbed until February 1946, an additional 26 months, and stringent controls remained in effect until June 1946. Qualitative evidence suggests that evasion became more extensive toward the end of controls after rationing was abandoned and after VJ day put an end to the unifying spirit created by the War. For example, Patricia Lochridge (1944, 1946) traveled incognito for Women’s Home Companion, once at about the time when the Mitchell Committee was reporting, and once close to the end of controls. She reported evasion more extensive on her second trip. Or to take another example, the Mitchell Committee minimized the significance of forced uptrading in clothing. But by the end of the War even the officials at the OfI$e of Price Administration were acknowledging that forced uptrading was a serious problem (Bowles, 1946; Mansfield, 1947, p. 75).3 A conservative extrapolation of the Committee’s estimate shows that it must be considerably increased if prices in, say, June 1946 are to be compared with prices after the termination of controls. I computed this estimate by relying primarily on the following equation:
(1) where A, = the percentage error in indexi in June 1946,A1, = the percentage error in index i estimated by the Mitchell Committee, Bi, = the percentage increase in published index i from January 1941 to December 1943, and Ba = the percentage increase in published index i from January 1941 to June 1946. The explanation of this method for quality deterioration is as follows. The Bureau was measuring part of the deterioration. Equation (1) simply assumes a constant ratio between unmeasured and measured deterioration. This ratio is assumed to be accurately determined by the Mitchell Committee in the base period. Thus, if there was .5% “Mitchell inflation” for each 1% of “Bureau of Labor Statistics inflation” in the base period, the assumption is that this relationship continued unchanged during the period of extrapolation. This is a conservative assumption; the gap between measured and equilibrium prices probably increased more rapidly in the second period. It was assumed that the elimination of sales was a once-and3 Even earlier Katona and Leavens (1944) had challenged the Committee’s judgment on this issue.
412
HUGH
ROCKOFF
for-all change completed by December 1943. In the cases of clothing and house furnishings this judgment is supported by published data on markdowns as a percentage of net sales in department stores (McNair and,May , 1963, p. 24). Line 1 of Table 4 shows the result of carrying out these extrapolations for each item in Table 1 and recombining them using the base period weights. The Monrhly Labor Review in its regular footnote to the Consumer Price Index referred to an extrapolation to September 1945 carried out by the Stabilization Director. His estimate, about .4%, when added to the Committee’s upper bound, would fall within the lower end of the range shown in Table 4. 4. NEGLECTED
QUALITY
DETERIORATION
As can be seen in Table 2, the Mitchell Committee regarded unmeasured quality deterioration as the most serious problem affecting the index. Yet their definition of quality deterioration excluded many forms which would be counted in peacetime. To appreciate their definition it is necessaq to consider their role in the cost of living controversy. Wages under the Little Steel formula were tied to the consumer price index. Any adjustment proposed by the Committee might well become a basis for wage adjustment. Thus the Committee could not avoid considering whether a particular deterioration was a reasonable wartime burden or something for which labor could justly claim compensation. Their decision was to count only those forms of quality deterioration that clearly forced workers to make additional expenditures. In foods, only additional expenditures necessary to maintain base period nutritional levels were considered. In clothing only decreased durability was considered; changes in style, appearance, etc., were ignored. And this policy was followed consistently with respect to the other component indexes. To illustrate the difference between the Committee’s definition of quality deterioration and what might be called a peacetime definition, I will examine the rent index, one component for which good data exist. It was alleged by critics of the index that maintenance expenditures by landlords had decreased. The Committee (1945, p. 364) agreed, but argued that except in a negligible fraction of cases additional expenditures by tenants were not forced, and therefore no upward adjustment of the index was appropriate. Suppose instead one uses the opposite definition of quality deterioration: All declines in maintenance expenditures by landlords are to be counted as implicit price increases. Using this definition requires a considerable upward revision because the decline in maintenance expenditures was fairly substantial as is shown in the first column of Table 3. An appealing way of using this definition is the basis of the following equation:
INDIRECT
PRICE INCREASES TABLE
413
WORLD WAR II
3
Adjustment of the Rent Index for Changes in Maintenance Expenditures Adjusted rent index
Year 1939 1940 1941 1942 1943 1944 1945 1946”
Index of maintenance expenditures 100.0 99.0 102.8 91.4 79.9 80.2 81.9 84.3
Rent index 100.0 100.3 102.1 104.4 104.3 104.6 105.0 105.5
All maintenance expenditures 100.0 101.1 103.6 109.8 112.8 113.6 114.1 114.9
Urgent maintenance expenditures 98.5 99.6 102.0 108.1 111.0 111.7 112.2 112.9
Sources and Methods: Maintenance Expenditures and Costs: U. S. Congress, House (1947), pp. 169-171. Rent Index: various issues of the Monthly Labor Review. Column 3 was%omputed using Eq. (2). I#Jand MI were taken to be the means of the values for large and small structures. W, was taken to be the mean of the values for labor and materials. The source gives only the total increase for the latter. Intermediate values were interpolated using the indexes of hourly wages and consumer prices. Column 4 was computed by subtracting the product of WI and Mansfield’s (1947, p. 139) estimate of deferred expenditures in rental income, 1.5%, from column 3. D Year ending June 30, 1946.
Rnl* = & + 4(W* - M,),
(2)
where R, f = the maintenance constant rent index in year i, Ri = the unadjusted index, 4 = the share of maintenance expenditures in the base year’s rent, Wt = the ratio of the supply price of maintenance services in year i to the supply price in the base year, Mi = the ratio of maintenance expenditures by landlords in year i to expenditures in the base year. The equation was derived by considering the additional income a consumer would need in year i to buy maintenance services equivalent to the decrease in services provided by the landlord in comparison with what he provided in the base period. Taking this sum as a ratio to base period rental expenditures leads to the second term on the right hand side of Eq. (2). This adjustment, although rather simple, is in the spirit of the “hedonic” price index literature which includes a variety of attempts to evaluate changes in quality in order to measure true price increases.4 Column 2 of Table 3 is the published rent index, while column 3 is the index adjusted by Eq. (2). Although this adjustment could be much refined it suggests that fairly substantial changes are needed to convert the published index into one which holds maintenance expenditures stable. 4 Grilliches (1971) summarizes and evaluates this literature.
414
HUGH
ROCKOFF
Even if one were to exclude clearly postponable expenses, such as redecorating, from consideration, the necessary adjustment might still be considerable because some experts held that this class of maintenance expenditures was a rather small part of the total. Column 4 of Table 3 gives an estimate of the implicit rent increase based on a conservative estimate of postponable expenditures. 5. RATIONING
AND SHORTAGES
The greatest difficulty encountered in comparing prices before and after the termination of controls is that the composition of the market basket changed. Many items were in short supply; some were rationed and some disappeared completely from the market. The Committee argued that no upward adjustment in the index was necessary to reflect these changes, a position consistent with their view that only deteriorations which forced additional expenditures on workers should be counted. They even suggested (Mitchell, 1945, p. 369) that in some sense the money saved as a result of shortages might offset price increases. If one is interested, hgwever, in computing a price index which keeps some standard of hvmg constant through war and peace, then some upward adjustment for these changes is needed. The theoretical problem of how to adjust a consumer price index for nonprice rationing was explored by several British economists during the War: Rothbarth (1941), Kaldor (1941), and Nicholson (1942). Their arguments were summarized briefly in Tobin (1952), but the issue, especially on the practical side, does not seem to have been much explored since then. Rothbarth’s procedure requires finding consumer budgets which occurred under free market price systems; he calls them “virtual” price systems, in which the wartime pattern of consumption was consumed voluntarily. This requirement would be difficult to meet in the American case because of the extreme form of some of the distortions. Kaldor suggested a more practical option using a consumer surplus argument. The essential points are illustrated in Fig. 1. DD represents a typical consumer’s demand for some commodity, andP, is the price in the free market base period. Consumption is then QO. As a result of wartime rationing the amount which the consumer is permitted is reduced to Q1. To keep the diagram simple it is assumed that the price is held constant at PO. In fact, the price will tend to rise above PO because of both mandated and evasive increases. If a consumer’s income were augmented by an amount equal to the shaded area in the figure, he would be as well off under rationing as he was in the base period. Thus it is natural to take the ratio of this area to base period income as the appropriate factor for adjusting the price index. Assuming a linear demand curve leads to the following equation: A = %SiRJE,
(3)
INDIRECT
I
PRICE INCREASES
Ql
WORLD WAR II
415
Qo
FIG. 1. The loss of consumer’s surplus with efficient rationing.
where A = the adjustment to the consumer price index to account for rationing of good i, St = the weight of good i in the index, its value share in base period income, Ri = the proportionate reduction in the consumption of good i (defined positively), and E = the elasticity of demand of good i (defined positively). Nicholson (1942) recognized a difficulty implied by relative price changes from the base period. His equation reduces to (3) under the simplifying assumption that the price increase was the same for rationed and unrationed goods. The intuitive case for (3) can be strengthened by considering the shadow price of Q1 it implies. This price, call it P*, is given by P* = P, + %Ri(P,
- P,),
(4)
where the symbols are the same as before. In other words, the argument suggests using P* in the Laspeyres index to reflect the forced reduction of consumption by Ri. When Ri is zero, the case of no rationing, P* naturally is equal to PO. When R, is 1, complete disappearance, P* is the mean of PI and PO. In intermediate cases P* is closer to P,, than P,. Thus, Eq. (3) yields a shadow price which is well below the price which in a free market would produce the same level of consumption. Many goods ranging from whipped cream to gasoline were in short supply at one point of time or another during the War, and a complete adjustment of the index would require taking all of these cases into account. Many of them, however, were caused by surging wartime demand and did not require consumers to reduce their consumption below prewar levels. For example, production of most of the rationed foodstuffs was close to or above prewar levels (Redford, 1947, passim; U.S. Bureau of the Census, 1960, pp. 186-187). Here I will explore two of the most important short-
416
HUGH ROCKOFF
ages: the disappearance of consumer durables and the meat shortages of 1946. In 1942 and 1943 the following durables were dropped from the index because they could no longer be priced: new and used automobiles, washing machines, radios, metal bed springs and innerspring mattresses, studio couches, sewing machines, vacuum cleaners, and gas cook stoves (Williams, 1943, p. 84). Together these items accounted for about 4.7% of the index in 1935-1939. The Bureau, however, did not follow a procedure, such as Eq. (3), that would incorporate the welfare effects of these changes. Instead, when a durable disappeared the Bureau shifted the weight in the index of that item to close substitutes or to the “unallocated” group. It was assumed that the prices of items in the unallocated group moved up at the same rate as the remainder of the index. To make the argument more concrete consider the Bureau’s treatment of automobiles. In 1942 new car production for the civilian market was halted, and gasoline rationing was introduced. In response, the Bureau dropped new cars from the index in January 1942 and dropped used cars in June for the Eastern seaboard and in December for other areas. The weights of gasoline and oil were sharply reduced, and the weight of automobile insurance was moderately reduced. Part of the weight applied to these prices was shifted to automobile repairs and to streetcar and bus fares; the remainder was shifted to the unallocated group. Thus, the Bureau implicitly assumed that there was no difference between, say, a 10% increase in the price of all goods including automobiles and a 10% increase in the price of all goods except automobiles-and the complete disappearance of automobiles from the market place.5 Line 3 of Table 4 gives upper and lower bounds on an estimate of the effect of the disappearance of consumer durables based on Eq. (3). The footnotes to the table explain the details of the calculations. The elasticities chosen span the range for individual durables found in one set of postwar demand studies. It is likely that the demand for durables in the aggregate is less elastic than for one type separately, so on this account the estimates are likely to be conservative. Thus, neglecting the disappearance of consumer durables created an understatement in December 1943 that was at least from 55 to 72% as large as the understatement from concealed price increases. The Bureau adopted a somewhat different procedure in adjusting the consumer price index during the meat shortages that developed during the transition to a free price system in 1946. When the Bureau could not price a given cut of meat because it was no longer available, it simply repeated ’ When the Bureau reintroduced automobiles in 1946 it allowed the index to fall slightly because the ceiling price of automobiles, which was the price used by the Bureau, was up less than the average. Many automobiles were actually purchased at prices above the ceiling, but the Bureau did not try to measure this (U. S. Congress, House, 1951, p. 35).
INDIRECT
PRICE INCREASES TABLE
417
WORLD WAR II
4
Summary of Adjustments to the Consumer Price Index, December 1943 and June 1946 December 1943 Source Concealed price increases (Mitchell Committee) Quality deterioration in rented dwellings Shortages of consumer durables Shortages of meat Total
June 1946
Lower bound (%I
Upper bound (%)
Lower bound (%I
Upper bound em
2.0
3.2
3.2
4.8
1.0
1.3
1.0
1.3
1.1 0 4.1
2.3 0 6.8
.3 .3 4.8
.6 .6 1.3
Sources and Merhods: Mitchell Committee, December 1943: Mitchell (1945), p. 295; June 1946: an extrapolation based on Eq. (1). Rented dwellings, December 1943 and June 1946: Table 3. Shortages of consumer durables, December 1943 and June 1946: computed using Eq. (3). R, was set equal to 1 in December 1943 and .5 in June 1946. These assump tions are consistent with the production figures for automobiles. The range of elasticities was - 1 to -2. See Harberger (1960). Shortages of meat, June 1946, computed using Eq. (3). Ri was set equal to .41. This was the unweighted proportion of cities failing to report new meat prices. The range of elasticities was -1 to -2. See Purcell and Rounikar (1971).
the price of that cut from the last month when it was available. In June 1946 the Bureau, to quote, was “forced to assume that meat prices remained constant in 23 of 56 cities” (Monthly Labor Review, August 1946, p. 259). In October 1946 the price of pork was held constant for all cities, and the prices of round steak, rib roast, chuck roast, beef liver, hamburger, veal cutlet, leg of lamb, and lamb chops were held constant depending on the cut, in 28 to 41 of the 56 cities (Monthly Labor Review, December 1946, p. 1000). Clearly, the use of such an index to chart the course of food prices, for example, to compare prices before and after decontrol, could lead to extremely misleading conclusions. The Bureau offered two defenses for this procedure. One was that they had to do something because many contracts depended on the regular publication of the index. The other, which was better grounded, was that the index would still be valid for longer comparisons between nonshortage months. Given the suddenness of the shortages and their temporary nature, the Bureau’s position is understandable, but this does not alter the point that the index, and particularly the food index, was misleading during these months.s B The Wall Street Journal (June 27, 1946, p. 1) gave a number of black market prices for meat in New York City, but not enough of course, to construct an alternative index.
418
HUGH
ROCKOFF
Line 4 of Table 4 contains a range of adjustments for the index based on Eq. (3). Details of the estimates are given in the footnotes to the table. The range of elasticities chosen corresponds to those found for individual meats in a recent postwar study. Presumably meat as a whole would have a smaller elasticity than for one type taken separately, so again the estimates can be regarded as conservative. 6. THE IMPLICATIONS
FOR THE DESCRIPTION
OF REAL WAGES
Let us return to one of the facts which initially engaged our attention. Were hourly real wages truly higher just before the termination of controls in June 1946 than they were over 2 years later when prices reached their postwar peak? The burden of our argument is that when adjustments are made to the consumer price index, to account for various wartime indirect increases, the comparison must be considered in doubt. Measured hourly real wages fell about 5.1% from June 1946 to August 1948. This is above a conservative extrapolation of the Mitchell Committee’s upper bound estimate, but well below the upper bound of the Committee’s estimate when partially adjusted to a peacetime basis. Not all of the decline in weekly real wages from their wartime measured peak can be offset in this way, although a substantial fraction can be, but when it is remembered that the adjustments proposed are only a subset of the potential, it becomes clear that even this decline must be considered doubtful. In making these comparisons I was assuming that the downward bias had disappeared by August 1948. This seems reasonable. For example, the quality of wearing apparel improved (Mack, 1948), and the adjustments in the index weights due to shortages were eliminated (Hurwitz, 1948, p. 157). Nevertheless, any remaining bias would reduce the proportion of the postwar decline in measured real wages that could be offset by a decline in the adjustments for indirect price increases. I was also assuming that there were no offsetting errors in the wage index during the War. This is not strictly correct. In a few cities there were genuine black markets for labor (Dunlop and Hill, 1950, pp. 96-97), but much of the cheating was in the form of promoting workers to higher job classifications even though no additional work or responsibility was involved. The procedure used for calculating nominal wages, dividing total wage bills by total hours, is invariant with respect to this technique. Finally, I was neglecting certain forms of “psychic” income that might have offset the effects of the factors discussed above. The belief that wartime shortages were part of the price for defeating the Axis must have made these deprivations easier to bear, and the tight labor market that prevailed during most of the War added an important element of security. But these and similar considerations take us beyond the limited scope of this paper.
INDIRECT
PRICE INCREASES
WORLD WAR II
419
ACKNOWLEDGMENTS I am indebted to Stanley Engerman, David Good, Maury Randall, Richard Sylla, and two anonymous referees for helpful comments on earlier drafts. I also wish to thank the participants in the discussion of the paper at the economic history workshop of the University of Chicago, especially Margaret Reid, and at the 1977 Cliometrics Conference at the University of Wisconsin in Madison. Responsibility for the remaining errors is mine. The Rutgers University Research Council provided financial assistance.
REFERENCES Amow, K. S. (1951, “The Attack on the Cost of Living Index.” In Inter-University Case Washington: Committee on Public Program, Cases in Public Administration. Administration Cases. Vol. 1. Bowles, C. (1946) “Crisis in Clothes,” Coiliers 117, 14-15+. Clinard, M. B. (1952), The Black Market: A Study of White Collar Crime. New York: Rinehart. Dunlop, 5. T., and Hill, A. D. (1950), The Wage Aa$stment Board: Wartime Stabilization in the Building and Construction Industry. Cambridge: Harvard University Press. Friedman, M., and Schwartz, A. J. (1963), A Monetary History of the United States. Princeton: Princeton University Press. Galbraith, J. K. (1975), Money: Whence It Came, Where It Went. Boston: Houghton & Mifflin. Grilliches, Z. (1971), “Introduction: Hedonic Price Indexes Revisited.” In Z. Grilliches (Ed.), Price Indexes and Quality Change: Studies in New Methods of Measurement. Cambridge: Harvard University Press. Pp. 3- 15. Harberger, A. (Ed.) (1960), The Demand for Durable Goods. Chicago: University of Chicago Press. Hurwitz, A. (1948), “Consumers’ Price Index: Relative Importance of Components.” Monthly Labor Review 67, 157-160. Kaldor, N. (1941), “Rationing and the Cost of Living Index.” Review of Economic Studies 8, 185- 187. Katona, G., and Leavens, D. H. (1944), “Price Increases and Uptrading: The Change in Advertised Prices of Apparel and House Furnishings.” The Journal of Business 17, 231-243. Kruskal, W. H., and Telser, L. G. (1960) “Food Prices and the Bureau of Labor Statistics.” The Journal of Business 33, 259-279. Lochridge, P. (1944), “I Shopped the Black Market.” Woman’s Home Companion 71, 20-21+. Lochridge, P. (1946), “I Shop the Black Market Again.” Woman’s Home Companion 78,4+. Mack, L. J. (1948), “Postwar Changes in the Quality of Apparel.” Monthly Labor Review 67, 34-39. McNair, M. P., and May, E. G. (1%3), The American Department Store, 1920-60. Cambridge: Harvard University, Graduate School of Business Administration. Mansfield, H. C. (1947), A Short History of OPA, General Publication No. 15 of Historical Reports on War Administration: O&e ofPrice Administration. Washington: Govemment Printing Office. Meany, G., and Thomas, R. J. (1944) “Recommended Report for the Presidential Committee on the Cost of Living.” Washington D. C. Mills, F. C. (Chairman, Special Committee of the American Statistical Association) (1943, 1944), “An Appraisal of the U. S. Bureau of Labor Statistics’ ‘Cost of Living Index’.”
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HUGH ROCKOFF
Journal of the American Statistical Association 38,389-405; “Appendix,” 39,51-95. Reprinted in Davis, W. H. (Chairman) (1945), Report of the President’s Committee on the Cost of Living. Washington: Government Printing Office. Mitchell, W. C. (Chairman), Kuznets, S., and Reid, M. G. (1945), “Prices and the Cost of Living in Wartime: An Appraisal of the Bureau of Labor Statistics Index on the Cost of Living in 1941-1944.” In W. H. Davis (Chairman), Report of the President’s Committee on the Cost of Living. Washington: Government Printing Office, Pp. 243-369. Nicholson, J. L. (1942-1943), “Rationing and Index Numbers.” The Review of Economic Studies 10, 68-72. Purcell, J. C., and Rounikar, R. (1971), “Price Elasticities from Panel Data: Meat, Poultry and Fish.” American Journal of Agricultural Economics 53, 216-221. Redford, E. C. (1947), Field Administration of Wartime Rationing, General Publication No. 4 of Historical Reports on War Administration: Ofice of Price Administration. Washington: Government Printing Office. Rothbarth, E. (1941), “The Measurement of Changes in Real Income Under Conditions of Rationing.” The Review of Economic Studies 8, 100-107. Rothwell, D. P. (1945), “The General Maximum Price Regulation.” Bulletin No. 879 of the Bureau of Labor Statistics. Washington: Government Printing Office. Tobin, J. (1952), “Survey of the Theory of Rationing.” Econometrica 20, 521-553. U. S. Bureau of the Census (1960), Historical Statistics of the United States, Colonial Times to 1957. Washington: Government Printing Office. U. S. Congress, House (1947), Banking and Currency Committee, Hearings on H.R. 2549, Statement of Ivan D. Carson, 80th Congress, 1st Session. U. S. Congress, House (1951), Education and Labor Committee, Consumer’s Price Index: Hearings before a Subcommittee of the Committee on Education and Labor, Pursuant to H. Res. 73, 82nd Congress, 1st Session. Williams, F. M. (1943) “Bureau of Labor Statistics Cost-of-Living Index in Wartime.” Monthly Labor Review 62, 82-95.
IN ECONOMIC
Indirect
HISTORY
15,
407-420 (1978)
Price Increases and Real Wages during World War II HUGH
ROCKOFF
Rutgers College
1. INTRODUCTION
The published consumer price index was remarkably stable during World War II, rising only about 3.3% per year between 1942 and 1945. Changes in nominal wages more than offset these increases, but in the postwar period prices increased more rapidly, and real wages fell. Table 1 shows the Bureau of Labor Statistics’ series on prices and real wages during this decade. Hourly real wages reached a peak in 1944 that was not surpassed until 1949, and the 1944 peak in weekly real wages was surpassed even later. The picture is essentially the same if one examines prices and real wages at key transition dates (part B). Hourly real wages rose after President Roosevelt’s Hold-the-Line order, which ushered in a period of stringent control, and then fell during the postwar inflation. The picture with respect to weekly wages is not so clear since this index fell during the period of stringent control, but it fell still further in the postwar period. It has been suggested, however, that this picture is misleading because the wartime price index fails to fully reflect various indirect price increases. The list of potential indirect increases is imposing: quality deterioration, elimination of sales, black market transactions, tie-in sales, rationing and shortages, etc.’ During the War organized labor was the strongest critic of the price index.2 Upset by the use of the index as a standard for wage changes, the so-called “Little Steel” formula, labor charged that the index was grossly biassed downward. The Bureau of Labor Statistics responded by requesting the American Statistical Association to investigate the index. The resulting report (Mills, 1943, 1944) acknowledged that there was a downward bias in the index but judged it to be small. President Roosevelt also responded to Labor’s criticism of the index. The Committee which he appointed requested a group of experts headed by Wesley C. Mitchell and including Simon Kuznets and Margaret G. Reid to undertake a detailed investigation of the index. The Mitchell Committee (1945), which had the largely qualitative findings of the Mills Committee in hand, went further by 1 Opinions can be found on both sides. Friedman and Schwartz (1963, p. 558) argue that unmeasured increases were significant, while Galbraith (1975, pp. 242-243) argues the opposite. 2 The report by Meany and Thomas (1944) summarizes Labor’s criticism of the index. A detailed account of the whole controversy is given in Amow (1951). 407
0014-4983/78/0154-0407$02.00/0 Copyright 0 1978 by Academic Press, Inc. Au tights of reproduction in my form reserved
408
HUGH ROCKOFF
quantifying the potential bias. While the Mitchell Committee found serious problems in some component indexes, their conclusion was that overall the error was small. The Bureau followed the recommendations of the Mitchell Committee. It changed the name of the index from “cost of living,” as it was then known, to “consumer price.” And it ran a footnote to the index describing the problems posed by indirect price increases and citing the Mitchell TABLE
I
Consumer Prices and Real Wages, 1940- 1950
Year or date
Consumer Price Index (1935-1939 = loo)
Hourly
Weekly
.66 .69 .73 .78 .81 .80 .78 .78 .79 .82 .85
25.15 28.12 31.43 34.87 36.66 34.52 31.41 31.31 31.50 32.27 34.51
98.6
.65
24.95
100.8
.68
27.52
125.1
.76
34.55
133.3
.81
32.49
174.5
.77
30.99
A Annual averages 100.2 105.2 116.6 123.7 125.7 128.6 139.5 159.6 171.9 170.2 171.9
1940 1941 1942 1943 1944 1945 1946 1947 1948 1949 1950
Real wage in manufacturing ($)
B Important dates August 1939 (beginning of World War II) January 1941 (beginning of the Little Steel Period) May 1943 (1 month after the Hold-theLine Order) June 1946 (price controls suspended) August 1948 (price peak) Sources:
Various issues of the Monthly
Labor
Revim,.
INDIRECT
PRICE INCREASES
WORLD WAR II
409
Committee’s estimate of the bias. In this it was following the Committee’s thinking that inspired guesses about the extent of the error should not be incorporated in the index. To do so would have left the Bureau open to charges that it was “tampering” with the index. In my judgment the report of the Mitchell Committee contains the best available evidence on the extent of indirect price increases, and their effect on the index, during the early part of the War. Nevertheless, the purpose of this paper is to re-open the issue. Due to constraints on its time and purpose, the estimates of the Mitchell Committee cannot be taken as the maximum necessary to make the wartime index appropriate for comparing real wages before and after the termination of controls. In the following sections I review these contraints and, where feasible, estimate corrections. It is important to emphasize that this paper is not intended as a criticism of the Mitchell Committee’s report, but rather as a warning against the uncritical use of its findings. Indeed, an appropriate subtitle might be “The Findings of the Mitchell Committee in Historical Perspective.” Moreover, the adjustments proposed are correct only when the index is being used to deflate nominal wages. For other purposes, for example, for evaluating the performance of the Office of Price Administration, other adjustments might be better. 2. THE FINDINGS OF THE MITCHELL COMMITTEE
The structure of the Mitchell Committee’s estimate of the error in the consumer price index is shown in Table 2. When these estimates are comTABLE
2
The Mitchell Committee’s Estimate of the Potential Errors in the Consumer Price Index, December 1943’ Source of error Component index Food Clothing House furnishings Rent Fuel, electricity, and ice Miscellaneous
Quality deterioration cm 1-3 4-5 7-9 0 0 0
Elimination of sales Pm .5 1 1 0 0 0
Forced uptrading VW
Under reporting (%I
0 0 l-2 0
.5-l 0 0 0
0 0
0 0
Miscellaneous (%I 0 0 0 1.51 0 0
Source: Mitchell (1945), pp. 316, 337, 355, and 365-369. a The Committee also estimated the bias that would be created by an attempt to apply the index to all workers, rather than those living in urban centers (.4). b New Unit bias (1) and rooming rent bias (.5).
410
HUGH
ROCKOFF
bined a total error of 2 to 3.2% results (line 1 of Table 4). The Bureau’s procedures overcame some of the difficulties posed by indirect price increases. For example, it priced items of given specifications so that the mere decline in a particular model would not effect the index. Nevertheless, the Committee agreed with the critics of the index that some changes had produced a downward bias. The Committee tried to set upper bounds on this bias by relying on a wide variety of supplementary evidence and its own knowledge of the market place. For a full description of the Committee’s methods the reader must turn to their report, but it will be useful for what follows to briefly describe the sources of error. Quality deterioration took many forms. In foods it was particularly ingenious: Candy bars shrank, fat was added to hamburger, roasted cereal was added to coffee, cornstarch was added to spices, and the butterfat content of ice cream was reduced without a corresponding reduction in price (Rothwell, 1945, p. 32). Since the Bureau priced at regular intervals, it often missed sales. The elimination of sales and discounts, a product of wartime price and wage controls and strong demand, was, therefore, a burden on those consumers who had availed themselves of these opportunities before the War which was not measured by the Bureau. The Committee, incidentally, estimated the effect of the elimination of weekend food sales, but took no notice of the elimination of end-of-day sales, a factor emphasized later by Kruskal and Telser (1960). Forced uptrading referred to the elimination of lower-priced lines of merchandise. The difference between what consumers would have been willing to pay voluntarily for a higher-quality item and what they were forced to pay because the cheaper alternative disappeared was in effect a price increase. Some uptrading was measured by the Bureau; when they were forced to price a more expensive item they counted one-half of the price differential as an increase. Except in the case of the house furnishings index, the Committee rejected claims that the Bureau’s adjustment for forced uptrading was insufficient. Perhaps as interesting as the sources of error examined by the Committee are those which they largely ignored. One might well ask, for example, why the Committee found so little evidence of black market activity, even though the classical discussion of the black market, Clinard (1952), argues that such activity was widespread. I can suggest two considerations that partially reconcile these positions: First, the Committee’s report came before a number of the more conspicuous black markets, for example, the postwar market in new cars; second, my impression is that many of the items traded on black markets were “luxury” items, such as the better cuts of meats, rather than the ordinary sort which entered the worker’s market basket being priced by the Bureau. The latter consideration may also explain why the Committee failed to consider the effects of an increased volume of tie-in sales.
INDIRECT
3. THE TIMING
PRICE INCREASES
WORLD WAR II
OF THE COMMITTEE’S
411
ESTIMATE
A major difficulty encountered in using the Committee’s estimate is that it came relatively early in the control period. The estimate covers the period January 1941 to December 1943, but during much of this period controls were relatively lax. The end of the Committee’s period occurs only 8 months after Roosevelt’s Hold-the-Line order. This policy remained undisturbed until February 1946, an additional 26 months, and stringent controls remained in effect until June 1946. Qualitative evidence suggests that evasion became more extensive toward the end of controls after rationing was abandoned and after VJ day put an end to the unifying spirit created by the War. For example, Patricia Lochridge (1944, 1946) traveled incognito for Women’s Home Companion, once at about the time when the Mitchell Committee was reporting, and once close to the end of controls. She reported evasion more extensive on her second trip. Or to take another example, the Mitchell Committee minimized the significance of forced uptrading in clothing. But by the end of the War even the officials at the OfI$e of Price Administration were acknowledging that forced uptrading was a serious problem (Bowles, 1946; Mansfield, 1947, p. 75).3 A conservative extrapolation of the Committee’s estimate shows that it must be considerably increased if prices in, say, June 1946 are to be compared with prices after the termination of controls. I computed this estimate by relying primarily on the following equation:
(1) where A, = the percentage error in indexi in June 1946,A1, = the percentage error in index i estimated by the Mitchell Committee, Bi, = the percentage increase in published index i from January 1941 to December 1943, and Ba = the percentage increase in published index i from January 1941 to June 1946. The explanation of this method for quality deterioration is as follows. The Bureau was measuring part of the deterioration. Equation (1) simply assumes a constant ratio between unmeasured and measured deterioration. This ratio is assumed to be accurately determined by the Mitchell Committee in the base period. Thus, if there was .5% “Mitchell inflation” for each 1% of “Bureau of Labor Statistics inflation” in the base period, the assumption is that this relationship continued unchanged during the period of extrapolation. This is a conservative assumption; the gap between measured and equilibrium prices probably increased more rapidly in the second period. It was assumed that the elimination of sales was a once-and3 Even earlier Katona and Leavens (1944) had challenged the Committee’s judgment on this issue.
412
HUGH
ROCKOFF
for-all change completed by December 1943. In the cases of clothing and house furnishings this judgment is supported by published data on markdowns as a percentage of net sales in department stores (McNair and,May , 1963, p. 24). Line 1 of Table 4 shows the result of carrying out these extrapolations for each item in Table 1 and recombining them using the base period weights. The Monrhly Labor Review in its regular footnote to the Consumer Price Index referred to an extrapolation to September 1945 carried out by the Stabilization Director. His estimate, about .4%, when added to the Committee’s upper bound, would fall within the lower end of the range shown in Table 4. 4. NEGLECTED
QUALITY
DETERIORATION
As can be seen in Table 2, the Mitchell Committee regarded unmeasured quality deterioration as the most serious problem affecting the index. Yet their definition of quality deterioration excluded many forms which would be counted in peacetime. To appreciate their definition it is necessaq to consider their role in the cost of living controversy. Wages under the Little Steel formula were tied to the consumer price index. Any adjustment proposed by the Committee might well become a basis for wage adjustment. Thus the Committee could not avoid considering whether a particular deterioration was a reasonable wartime burden or something for which labor could justly claim compensation. Their decision was to count only those forms of quality deterioration that clearly forced workers to make additional expenditures. In foods, only additional expenditures necessary to maintain base period nutritional levels were considered. In clothing only decreased durability was considered; changes in style, appearance, etc., were ignored. And this policy was followed consistently with respect to the other component indexes. To illustrate the difference between the Committee’s definition of quality deterioration and what might be called a peacetime definition, I will examine the rent index, one component for which good data exist. It was alleged by critics of the index that maintenance expenditures by landlords had decreased. The Committee (1945, p. 364) agreed, but argued that except in a negligible fraction of cases additional expenditures by tenants were not forced, and therefore no upward adjustment of the index was appropriate. Suppose instead one uses the opposite definition of quality deterioration: All declines in maintenance expenditures by landlords are to be counted as implicit price increases. Using this definition requires a considerable upward revision because the decline in maintenance expenditures was fairly substantial as is shown in the first column of Table 3. An appealing way of using this definition is the basis of the following equation:
INDIRECT
PRICE INCREASES TABLE
413
WORLD WAR II
3
Adjustment of the Rent Index for Changes in Maintenance Expenditures Adjusted rent index
Year 1939 1940 1941 1942 1943 1944 1945 1946”
Index of maintenance expenditures 100.0 99.0 102.8 91.4 79.9 80.2 81.9 84.3
Rent index 100.0 100.3 102.1 104.4 104.3 104.6 105.0 105.5
All maintenance expenditures 100.0 101.1 103.6 109.8 112.8 113.6 114.1 114.9
Urgent maintenance expenditures 98.5 99.6 102.0 108.1 111.0 111.7 112.2 112.9
Sources and Methods: Maintenance Expenditures and Costs: U. S. Congress, House (1947), pp. 169-171. Rent Index: various issues of the Monthly Labor Review. Column 3 was%omputed using Eq. (2). I#Jand MI were taken to be the means of the values for large and small structures. W, was taken to be the mean of the values for labor and materials. The source gives only the total increase for the latter. Intermediate values were interpolated using the indexes of hourly wages and consumer prices. Column 4 was computed by subtracting the product of WI and Mansfield’s (1947, p. 139) estimate of deferred expenditures in rental income, 1.5%, from column 3. D Year ending June 30, 1946.
Rnl* = & + 4(W* - M,),
(2)
where R, f = the maintenance constant rent index in year i, Ri = the unadjusted index, 4 = the share of maintenance expenditures in the base year’s rent, Wt = the ratio of the supply price of maintenance services in year i to the supply price in the base year, Mi = the ratio of maintenance expenditures by landlords in year i to expenditures in the base year. The equation was derived by considering the additional income a consumer would need in year i to buy maintenance services equivalent to the decrease in services provided by the landlord in comparison with what he provided in the base period. Taking this sum as a ratio to base period rental expenditures leads to the second term on the right hand side of Eq. (2). This adjustment, although rather simple, is in the spirit of the “hedonic” price index literature which includes a variety of attempts to evaluate changes in quality in order to measure true price increases.4 Column 2 of Table 3 is the published rent index, while column 3 is the index adjusted by Eq. (2). Although this adjustment could be much refined it suggests that fairly substantial changes are needed to convert the published index into one which holds maintenance expenditures stable. 4 Grilliches (1971) summarizes and evaluates this literature.
414
HUGH
ROCKOFF
Even if one were to exclude clearly postponable expenses, such as redecorating, from consideration, the necessary adjustment might still be considerable because some experts held that this class of maintenance expenditures was a rather small part of the total. Column 4 of Table 3 gives an estimate of the implicit rent increase based on a conservative estimate of postponable expenditures. 5. RATIONING
AND SHORTAGES
The greatest difficulty encountered in comparing prices before and after the termination of controls is that the composition of the market basket changed. Many items were in short supply; some were rationed and some disappeared completely from the market. The Committee argued that no upward adjustment in the index was necessary to reflect these changes, a position consistent with their view that only deteriorations which forced additional expenditures on workers should be counted. They even suggested (Mitchell, 1945, p. 369) that in some sense the money saved as a result of shortages might offset price increases. If one is interested, hgwever, in computing a price index which keeps some standard of hvmg constant through war and peace, then some upward adjustment for these changes is needed. The theoretical problem of how to adjust a consumer price index for nonprice rationing was explored by several British economists during the War: Rothbarth (1941), Kaldor (1941), and Nicholson (1942). Their arguments were summarized briefly in Tobin (1952), but the issue, especially on the practical side, does not seem to have been much explored since then. Rothbarth’s procedure requires finding consumer budgets which occurred under free market price systems; he calls them “virtual” price systems, in which the wartime pattern of consumption was consumed voluntarily. This requirement would be difficult to meet in the American case because of the extreme form of some of the distortions. Kaldor suggested a more practical option using a consumer surplus argument. The essential points are illustrated in Fig. 1. DD represents a typical consumer’s demand for some commodity, andP, is the price in the free market base period. Consumption is then QO. As a result of wartime rationing the amount which the consumer is permitted is reduced to Q1. To keep the diagram simple it is assumed that the price is held constant at PO. In fact, the price will tend to rise above PO because of both mandated and evasive increases. If a consumer’s income were augmented by an amount equal to the shaded area in the figure, he would be as well off under rationing as he was in the base period. Thus it is natural to take the ratio of this area to base period income as the appropriate factor for adjusting the price index. Assuming a linear demand curve leads to the following equation: A = %SiRJE,
(3)
INDIRECT
I
PRICE INCREASES
Ql
WORLD WAR II
415
Qo
FIG. 1. The loss of consumer’s surplus with efficient rationing.
where A = the adjustment to the consumer price index to account for rationing of good i, St = the weight of good i in the index, its value share in base period income, Ri = the proportionate reduction in the consumption of good i (defined positively), and E = the elasticity of demand of good i (defined positively). Nicholson (1942) recognized a difficulty implied by relative price changes from the base period. His equation reduces to (3) under the simplifying assumption that the price increase was the same for rationed and unrationed goods. The intuitive case for (3) can be strengthened by considering the shadow price of Q1 it implies. This price, call it P*, is given by P* = P, + %Ri(P,
- P,),
(4)
where the symbols are the same as before. In other words, the argument suggests using P* in the Laspeyres index to reflect the forced reduction of consumption by Ri. When Ri is zero, the case of no rationing, P* naturally is equal to PO. When R, is 1, complete disappearance, P* is the mean of PI and PO. In intermediate cases P* is closer to P,, than P,. Thus, Eq. (3) yields a shadow price which is well below the price which in a free market would produce the same level of consumption. Many goods ranging from whipped cream to gasoline were in short supply at one point of time or another during the War, and a complete adjustment of the index would require taking all of these cases into account. Many of them, however, were caused by surging wartime demand and did not require consumers to reduce their consumption below prewar levels. For example, production of most of the rationed foodstuffs was close to or above prewar levels (Redford, 1947, passim; U.S. Bureau of the Census, 1960, pp. 186-187). Here I will explore two of the most important short-
416
HUGH ROCKOFF
ages: the disappearance of consumer durables and the meat shortages of 1946. In 1942 and 1943 the following durables were dropped from the index because they could no longer be priced: new and used automobiles, washing machines, radios, metal bed springs and innerspring mattresses, studio couches, sewing machines, vacuum cleaners, and gas cook stoves (Williams, 1943, p. 84). Together these items accounted for about 4.7% of the index in 1935-1939. The Bureau, however, did not follow a procedure, such as Eq. (3), that would incorporate the welfare effects of these changes. Instead, when a durable disappeared the Bureau shifted the weight in the index of that item to close substitutes or to the “unallocated” group. It was assumed that the prices of items in the unallocated group moved up at the same rate as the remainder of the index. To make the argument more concrete consider the Bureau’s treatment of automobiles. In 1942 new car production for the civilian market was halted, and gasoline rationing was introduced. In response, the Bureau dropped new cars from the index in January 1942 and dropped used cars in June for the Eastern seaboard and in December for other areas. The weights of gasoline and oil were sharply reduced, and the weight of automobile insurance was moderately reduced. Part of the weight applied to these prices was shifted to automobile repairs and to streetcar and bus fares; the remainder was shifted to the unallocated group. Thus, the Bureau implicitly assumed that there was no difference between, say, a 10% increase in the price of all goods including automobiles and a 10% increase in the price of all goods except automobiles-and the complete disappearance of automobiles from the market place.5 Line 3 of Table 4 gives upper and lower bounds on an estimate of the effect of the disappearance of consumer durables based on Eq. (3). The footnotes to the table explain the details of the calculations. The elasticities chosen span the range for individual durables found in one set of postwar demand studies. It is likely that the demand for durables in the aggregate is less elastic than for one type separately, so on this account the estimates are likely to be conservative. Thus, neglecting the disappearance of consumer durables created an understatement in December 1943 that was at least from 55 to 72% as large as the understatement from concealed price increases. The Bureau adopted a somewhat different procedure in adjusting the consumer price index during the meat shortages that developed during the transition to a free price system in 1946. When the Bureau could not price a given cut of meat because it was no longer available, it simply repeated ’ When the Bureau reintroduced automobiles in 1946 it allowed the index to fall slightly because the ceiling price of automobiles, which was the price used by the Bureau, was up less than the average. Many automobiles were actually purchased at prices above the ceiling, but the Bureau did not try to measure this (U. S. Congress, House, 1951, p. 35).
INDIRECT
PRICE INCREASES TABLE
417
WORLD WAR II
4
Summary of Adjustments to the Consumer Price Index, December 1943 and June 1946 December 1943 Source Concealed price increases (Mitchell Committee) Quality deterioration in rented dwellings Shortages of consumer durables Shortages of meat Total
June 1946
Lower bound (%I
Upper bound (%)
Lower bound (%I
Upper bound em
2.0
3.2
3.2
4.8
1.0
1.3
1.0
1.3
1.1 0 4.1
2.3 0 6.8
.3 .3 4.8
.6 .6 1.3
Sources and Merhods: Mitchell Committee, December 1943: Mitchell (1945), p. 295; June 1946: an extrapolation based on Eq. (1). Rented dwellings, December 1943 and June 1946: Table 3. Shortages of consumer durables, December 1943 and June 1946: computed using Eq. (3). R, was set equal to 1 in December 1943 and .5 in June 1946. These assump tions are consistent with the production figures for automobiles. The range of elasticities was - 1 to -2. See Harberger (1960). Shortages of meat, June 1946, computed using Eq. (3). Ri was set equal to .41. This was the unweighted proportion of cities failing to report new meat prices. The range of elasticities was -1 to -2. See Purcell and Rounikar (1971).
the price of that cut from the last month when it was available. In June 1946 the Bureau, to quote, was “forced to assume that meat prices remained constant in 23 of 56 cities” (Monthly Labor Review, August 1946, p. 259). In October 1946 the price of pork was held constant for all cities, and the prices of round steak, rib roast, chuck roast, beef liver, hamburger, veal cutlet, leg of lamb, and lamb chops were held constant depending on the cut, in 28 to 41 of the 56 cities (Monthly Labor Review, December 1946, p. 1000). Clearly, the use of such an index to chart the course of food prices, for example, to compare prices before and after decontrol, could lead to extremely misleading conclusions. The Bureau offered two defenses for this procedure. One was that they had to do something because many contracts depended on the regular publication of the index. The other, which was better grounded, was that the index would still be valid for longer comparisons between nonshortage months. Given the suddenness of the shortages and their temporary nature, the Bureau’s position is understandable, but this does not alter the point that the index, and particularly the food index, was misleading during these months.s B The Wall Street Journal (June 27, 1946, p. 1) gave a number of black market prices for meat in New York City, but not enough of course, to construct an alternative index.
418
HUGH
ROCKOFF
Line 4 of Table 4 contains a range of adjustments for the index based on Eq. (3). Details of the estimates are given in the footnotes to the table. The range of elasticities chosen corresponds to those found for individual meats in a recent postwar study. Presumably meat as a whole would have a smaller elasticity than for one type taken separately, so again the estimates can be regarded as conservative. 6. THE IMPLICATIONS
FOR THE DESCRIPTION
OF REAL WAGES
Let us return to one of the facts which initially engaged our attention. Were hourly real wages truly higher just before the termination of controls in June 1946 than they were over 2 years later when prices reached their postwar peak? The burden of our argument is that when adjustments are made to the consumer price index, to account for various wartime indirect increases, the comparison must be considered in doubt. Measured hourly real wages fell about 5.1% from June 1946 to August 1948. This is above a conservative extrapolation of the Mitchell Committee’s upper bound estimate, but well below the upper bound of the Committee’s estimate when partially adjusted to a peacetime basis. Not all of the decline in weekly real wages from their wartime measured peak can be offset in this way, although a substantial fraction can be, but when it is remembered that the adjustments proposed are only a subset of the potential, it becomes clear that even this decline must be considered doubtful. In making these comparisons I was assuming that the downward bias had disappeared by August 1948. This seems reasonable. For example, the quality of wearing apparel improved (Mack, 1948), and the adjustments in the index weights due to shortages were eliminated (Hurwitz, 1948, p. 157). Nevertheless, any remaining bias would reduce the proportion of the postwar decline in measured real wages that could be offset by a decline in the adjustments for indirect price increases. I was also assuming that there were no offsetting errors in the wage index during the War. This is not strictly correct. In a few cities there were genuine black markets for labor (Dunlop and Hill, 1950, pp. 96-97), but much of the cheating was in the form of promoting workers to higher job classifications even though no additional work or responsibility was involved. The procedure used for calculating nominal wages, dividing total wage bills by total hours, is invariant with respect to this technique. Finally, I was neglecting certain forms of “psychic” income that might have offset the effects of the factors discussed above. The belief that wartime shortages were part of the price for defeating the Axis must have made these deprivations easier to bear, and the tight labor market that prevailed during most of the War added an important element of security. But these and similar considerations take us beyond the limited scope of this paper.
INDIRECT
PRICE INCREASES
WORLD WAR II
419
ACKNOWLEDGMENTS I am indebted to Stanley Engerman, David Good, Maury Randall, Richard Sylla, and two anonymous referees for helpful comments on earlier drafts. I also wish to thank the participants in the discussion of the paper at the economic history workshop of the University of Chicago, especially Margaret Reid, and at the 1977 Cliometrics Conference at the University of Wisconsin in Madison. Responsibility for the remaining errors is mine. The Rutgers University Research Council provided financial assistance.
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