Unions, the high-wage doctrine, and employment.

• Author: Gallaway, Lowell E.
• Position: Report

In the more than 200 years in which formal organizations of workers (labor unions) have existed in the United States, there have been three distinct eras of policy toward them. Initially, in the late 18th and early 19th century, they were regarded as associations that came under the purview of the English common-law doctrine of conspiracy--that is, their very existence could be considered illegal, regardless of the objectives of the group.

The first significant departure from that doctrine came in 1842, in a Massachusetts court. In Commonwealth v. Hunt, the conspiracy doctrine was rejected. That decision generally was accepted in other state courts, and it ushered in a period of neutrality with respect to the very presence of an organization of workers. The specific acts of labor organizations were still actionable, but not the existence of the organization itself. However, the law did not provide protection or encourage labor organizations.

This posture became the status quo for nearly a century until the 1930s, when public policy shifted in the direction of offering an explicit mechanism to facilitate worker organization, while providing protection for such groups once they came into being. The changes were embodied in the National Labor Relations Act of 1935, popularly known as the Wagner Act. With the passage of this legislation, the present era of public protection of labor unions was created. Why this happened, and its impact on the American economy, are the subjects of this article.

The 1920-21 Recession and the High-Wage Doctrine

Our story begins with the last significant business cycle downturn before the onset of the Great Depression in 1929, the one embracing the years 1920-21. It is here that the stage began to be set for the sea changes in public policy that occurred in the 1930s. In the first year of this period, wholesale prices fell by nearly 10 percent, while money wage rates increased by almost 6 percent (Vedder and Gallaway 1997: 63). That combination led to a 17 percent rise in real wage rates and an 18 percent fall in factory jobs and industrial output. That was merely the beginning. In the first two quarters of 1921, wholesale prices plummeted to 65 percent of what they had been in the first quarter of 1920. Money wages also fell, but not nearly as rapidly, and, by the middle of 1921, real wages were more than 40 percent higher than at the beginning of 1920. At that juncture, both factory employment and industrial output had fallen by nearly 30 percent (Vedder and Gallaway 1997). Stanley Lebergott (1964) estimated the unemployment rate for 1921 at 11.7 percent.

During 1921, money wages fell by more than 18 percent. In the 18 months that followed, industrial output soared by about 50 percent, while the number of factory jobs rose by nearly 30 percent (Vedder and Gallaway 1997: 63). According to Lebergott's (1964) estimates, the unemployment rate fell to 6.7 percent in 1922, and to 2.4 percent in 1923, presaging the "Roaring Twenties." Over the next six years, the unemployment rate averaged about 3.6 percent.

Yet, there was discontent with this sequence of events. In particular, the secretary of commerce during this period, Herbert Hoover, was revolted by it, insisting that there must be a better way to deal with business cycles. To him, the recovery had been achieved by imposing a high cost on the "bones of labor." Thus, he convinced President Warren G. Harding to convene a Conference on Unemployment to discuss "better ways" to deal with the unemployment issue. Hoover controlled the agenda, selected the participants, and saw to it that the laissez-faire view of allowing markets to generate recovery got short shrift. Still, the actual recovery following the downturn of 1920-21 came so quickly that there were no policy impacts emanating from this conference. However, the conference did anticipate the arrival on the national scene of what became known as the "high-wage doctrine."

Many of the conference participants believed that unemployment is the result of a lack of spending and that raising money wage rates would alleviate this shortfall. A popular publication, The Nation (12 October 1921: 389) went so far as to declare, "If it [the conference] really succeeds in its commendable attempt to stimulate buying by forcing manufacturers, middlemen, and merchants to accept lower profits, it will have done better than could have been expected."

The overall tone of the conference was anti-market adjustment. In some ways, it anticipated John Maynard Keynes. The Report on the President's Conference on Unemployment (1921) recommended counter-cyclical government public works spending, and even referred to "the multiplying effects of successive use of funds in circulation." Moreover, it rejected the notion that movements in relative prices (particularly declines in money-wage rates) could alleviate unemployment. Hoover promoted this view throughout the 1920s. According to Hoover (1923: 5), "We are continually reminded ... that there is an ebb and flow in the demand for commodities that cannot ... be regulated. I have great doubt whether there is a real foundation for this view."

Businessmen claimed in with support for the idea. In 1923, Boston retailer Edward Filene defended a wide range of measures that served to increase wage costs, such as minimum wage laws. He was not unique in his views. Earlier, Henry Ford had instituted a $5 a day wage, a level that was significantly higher than the standard wage of that time. Thomas Edison also expressed profound skepticism about the efficacy of market adjustments in eliminating unemployment (Dorfman 1959: vol. 4, chap. 2).

Elsewhere in America, the high-wage doctrine had advocates (see Taylor and Selgin 1999). To no one's surprise, labor union leaders argued for it. But, so did church groups, such as the Federal Council of the Churches of Christ in America. Finally, writers William Foster and Waddill Catchings (1925, 1927, 1928) offered a popular version of the high-wage doctrine. The title of their second book, Business without a Buyer, encapsulated their basic thesis--namely, that workers are the largest group of buyers of business products and paying them higher wages will better enable them to purchase the offerings of the business community.

The 1929 Crash and Hoover's High-Wage Policy

This is how things stood as the United States entered 1929. Herbert Hoover, a firm believer in the high-wage doctrine, had just been elected president. At the time of his election, in November 1928, the doctrine appeared to be a minor aspect of his political record. Unemployment was not a significant issue at the time of his election or when he was inaugurated in March 1929. Yet, before the year was out, the earth had moved under his feet. The stock market crashed in October and, according to one estimate, the unemployment rate increased to 9 percent in December (Vedder and Gallaway 1997: 77).

This was similar to 1921. The one major difference was that Hoover was not just a cabinet member; he was president. Thus, he could pursue his high-wage instincts directly, and he did. In late November, he assembled a group of major business figures at the White House. He importuned them to forego any money wage rate reductions in response to the depressed economic conditions, At the conclusion of the conference, the press release stated:

The President was authorized by the employers who were present at this morning's conference to state on their individual behalf that they will not initiate any movement for wage reductions, and it is their strong recommendation that this attitude should be pursued by the society as a whole.... They considered that, aside from the human considerations involved, the consuming power of the country will thereby be maintained [New York Times, 22 November 1929].

When Henry Ford left the White House, he offered these comments concerning this issue:

Nearly everything in this country is too high priced...