Price Fishback on Labor Policy in the Great Depression
Kick-Starting Employment

Union Strength, Unemployment, and the Great Depression

UCLA economist Lee Ohanian writes, in "What - or Who - Started the Great Depression?":

The defining characteristic of the Great Depression is a substantial and chronic excess supply of labor, with employment well below normal, and real wages in key industrial sectors well above normal.... President Hoover... offered industrial firms protection from unions in return for paying high wages. Firms deeply feared unions... [and] a sea change in economic policy, including policies advanced and supported by Hoover, that significantly fostered unionization and enhanced their bargaining power.... [T]he Depression is the consequence of government programs and policies, including those of Hoover, that increased labor’s ability to raise wages above their competitive levels. The Depression would have been much less severe in the absence of Hoover’s program.... Presidents Hoover and Roosevelt shared similar goals of fostering industrial collusion and increasing real wages and raising labor’s bargaining power. Hoover accomplished these goals... by inducing industry to maintain nominal wages, and by promoting and signing legislation that facilitated union organization and that increased wages above competitive levels, including the Davis-Bacon Act and the Norris-Lagaurdia Act. Roosevelt accomplished these goals with... the Wagner Act.... The 1930s would have been a better economic decade had government policy promoted competition in product and labor markets...

There are three problems with ascribing a big role to this.

The first is that Herbert Hoover's interventions in the labor market were absolutely tiny. If Hoover's signing of Norris-Laguardia and Davis-Bacon plus his meetings in the White House with business leades were enough to drive unemployment up from 2% to 25%, then Roosevelt's Wagner Act should have driven unemployment from 15% to 75%, and in western Europe--well, in western Europe we should see unemployment rates of 357%. The outcome is radically disproportional to the shocik that Ohanian claims drove it.

The second is that Ohanian's real wage is the inverse of a Blanchard-Kiyotaki markup, which is a consequences of low aggregate demand and high unemployment and not a cause. If you are a monopolistic competition-style New Keynesian, then you look at Ohanian and Cole and say "so"? This pattern is what you would expect to see whether or not union power or deficient aggregate demand is creating high unemployment.

The third, of course, is that Ohanian's measure of whether wages are above market levels is unconnected with the structural factors that he claims drove wages above market levels. Union power in the American economy reached its apogee in the 1950s, when union density reached 35% of non-farm employees and companies were the most frightened and prone to raise to keep unions out. The correlation between union density and unemployment that Ohanian's theory says should be very strong is simply not visible when one looks across decades: it is an hypothesis not borne out by empirical evidence.

As James Galbraith likes to say. Ohanian and Cole believe that high wages "relative to market clearing levels" caused the high unemployment of the 1930s both under FDR and under Hoover, but not not do so under Eisenhower. How do they know this? Because, they say, the labor market cleared--unemployment was low--in the 1950s but not in the 1930s, therefore the strong unions of the 1950s were weak and unable to exert market power while the weak unions of the 1930s were strong and able to choke off labor market competition. This argument seems to be not just a little bit circular.