The behavior of the labor market between Schechter (1935) and Jones & Laughlin (1937).

AuthorNeumann, Todd C.

Recent research on the Great Depression emphasizes the role New Deal economic policy played in slowing recovery. Policies pro-rooting cartels and higher wage rates during a time that the economy was experiencing unprecedented unemployment were likely to have created a negative supply shock that exacerbated economic depression rather than helped to 'alleviate it. Still, for 22 months between two important Supreme Court rulings, labor and product markets were relatively free of intervention. In A.L.A. Schechter Poultry Corp. v. United States' (May 1935), the Court ruled that the National Industrial Recovery Act of 1933 (NIRA) was unconstitutional. In addition to setting up industry cartels, the NIRA had imposed relatively high minimum hourly wage rates and restrictions on workweeks and required firms to recognize the right of labor to organize.

The National Labor Relations Act (NLRA), better known as the Wagner Act, was passed shortly 'after the Schechter ruling as a means of keeping one of the key labor provisions of the NIRA in place the legal fight of labor to bargain collectively. The Wagner Act had little or no effect, however, because it was widely expected that it too would be ruled unconstitutional. In April 1937, after President Franklin D. Roosevelt threatened to pack the Court with six more judges who would be friendly to his policies, the Court surprisingly upheld the constitutionality of the NLRA with its 5-4 decision in National Labor Relations Board v. Jones & Laughlin Steel. A large wave of union activity followed the ruling and average real hourly earnings rose dramatically.

Increases in equilibrium wage rates are the desirable by-product of rising worker productivity, but policy-driven wage increases, such as those that followed the NIRA and NLRA, would be expected to exacerbate the unemployment problem in a depressed economy. In fact, the economy experienced significant recovery between May 1935 and April 1937, only to falter again in the months that followed. In this article, we perform an empirical analysis to determine whether the different movements in labor input, output, and real wage rates between policy regimes persists when controlling for changes in fiscal and monetary policy. Our results suggest that the recovery that occurred between Schechter and Jones & Laughlin was indeed related to the absence of the harmful policies that preceded and followed those decisions.

The National Industrial Recovery Act

When the NIRA was passed in June 1933, it was hailed by the Roosevelt administration as the Magna Carta for the American worker (Johnson [1935] 1968: 239). This moniker primarily followed from the NIRA's Section 7(a), which gave workers the right to organize and bargain collectively. In fact, Kaufman (1996) notes that government recognition of organized labor's rights helped spur the tripling of union density in the two decades that followed. But the NIRA was designed by Roosevelt to do more than promote long-term reform through unionization. In the short term, it was hoped that the legislation would provide workers enhanced employment opportunities and higher pay through the institution of minimum-wage rates and maximum-hour (work-sharing) provisions among NIRA-covered industries.

The general consensus of economists studying the New Deal is that despite the long-run gains that the right to collective bargaining provided to workers, the NIRA was unsuccessful in its short-term goal of helping labor. Higher hourly wage rates may be viewed as a desirable economic goal during normal economic times, but it was exactly what the economy did not need with unemployment rates of 20 to 25 percent. Vedder and Gallaway (1993) claim that the persistence of unemployment during the 1930s can be traced to the wage-increasing New Deal policies such as the NIRA and the Wagner Act. Powell (2003) notes that the high-wage policies embedded in the NIRA accelerated the substitution of capital for labor and exacerbated the unemployment problem during the 1930s. Cole and Ohanian (2004) employ a general equilibrium empirical framework and conclude that the NIRA's broad labor and cartelization policies were the key factors that prevented a normal recovery from the Great Depression. On the less critical side, Bernanke (1986: 106) claims that the NIRA provisions "had little systematic impact.'" Additionally, Taylor (2011) finds that the work-sharing aspects of the NIRA's work-week reductions, when viewed by themselves, created jobs. However, he shows that these gains were almost entirely wiped out by the wage increases and cartelization that accompanied the policy regime. Thus, with regard to its short-term impact on labor, the general consensus is that the NIRA was neutral at best and, by raising wage rates in the face of unemployment, was detrimental and intensified the jobs shortage.

Of course the NIRA affected more than just the labor sector of the economy. Its dramatic attempt to bring about economic recovery centered on the cartelization of American industries. Industrial executives were required to meet and agree on "codes of fair competition" under which cartel objectives such as higher prices, product standardization, and other profit-enhancing limits to competition could be pursued. Industry cooperation was viewed as having been largely successful during World War I and was subsequently portrayed as the best hope for recovery from the Great Depression. Donald Richberg, general counsel of the National Recovery Administration (NRA) stated that "'thousands of businessmen themselves should know better than any small group of lawmakers" what specific collective efforts would best lead to economic recovery (Irons 1982: 97).

The NIRA established 765 industry and supplemental codes, each containing several cartel-oriented provisions. The most common provision--contained in over 400 codes, including those for steel, coal, newsprint, lead, and woodworking machinery industries--was open price filing, which required firms to file their prices with the cartel's central board and give advance notice, typically between 3 and 7 days, of any change in price. Such a requirement inhibits competition by revealing firms' pricing policies to rivals. When changes are instituted, rivals can either match the price or retaliate in other ways against a price-cutting firm, therefore giving the initial firm less incentive to change prices in the first place.

Of course, the NIRA cartel provisions went well beyond open price filing as at least 130 different categories of trade-practice provisions were contained within the NIRA codes (U.S. Committee of Industrial Analysis 1937: 74). For example, the Boot and Shoe Manufacturing code dictated that price increases had to accompany any cost-raising actions such as the use of special shoe boxes or labels (Article 8, Section 4). The Iron and Steel code restricted the construction of new capacity: "'none of the members of this code shall initiate the construction of any new blast furnace or open hearth or Bessemer steel capacity" (Article 5, Section 2). The Handkerchief code included standardization provisions: "No member of the industry shall use the words 'Hand Rolled Hem' to designate that class of handmade hem known as "Whipped Edge,' which latter term means any hem or edge on which the thread used to fasten same is whipped or looped around and encloses the entire rolled edge" (Article 7, Section 14). The Ice code forbade the "enticement of competitor's employees" in an attempt to limit competition for workers within the industry (Article 9, Section 2, Part 1). (1)

The aforementioned labor provisions--higher wage rates and union rights that had to be included in the codes--were viewed by many industrial executives at the time as the ransom paid for the suspension of antitrust laws and the imposition of a government-run cartel enforcement mechanism consisting of fines and potential imprisonment for code violators (Lyon et al. [1935] 1972: 91-92). Many scholars--such as Hawley (1966), Weinstein (1980), Alexander (1994, 1997), Krepps (1997), Taylor (2002,2007), and Taylor and Klein (2008)--have focused attention primarily on the cartel aspects of the NIRA. Again, the general consensus of these studies is that the cartel-enabling legislation reduced output, created deadweight losses, and harmed recovery.

That a policy of promoting cartels and raising wage rates in the face of 25 percent unemployment failed to help relieve macroeeonomic distress should be of no surprise to followers of neoclassical economic theory. Cartels generally curtail output rather than expand it, thus reducing the demand for labor. Furthermore, high unemployment generally means that wage rates need to fall, not rise, for the economy to get back to its full employment equilibrium. Still, while economists do not generally take such a position, some may argue that a policy that reduces total welfare, but increases welfare to workers at the expense of other economic groups, is desirable. Minimum wage laws, of which the NIRA was arguably the nation's first (although it did not create standardized or economy-wide minimum wage rates), have often been advanced by proponents based on this line of reasoning.

The Schechter Decision

The NIRA was set to expire on June 16, 1935, as the act was legislated to last for two years. Still there was serious debate about extending the legislation--in late May...

To continue reading

Request your trial

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT