Tuesday, November 26, 2019

Are Wages Sticky Downward?

Great Depression soup line

By Robert Wenzel

At the post, Some Terrible Economics Out of the American Economic Review, Austro-Punk comments:
While government creates a lot of rigidity in nominal wages, they would certainly be prevalent in a free market. Rothbard explains on pages 44-45 of AGD:

"Both workers and businessmen may become persuaded by the
mistaken idea that artificial propping of wage rates is beneficial.
This factor played a great role in the 1929 depression. As early as
the 1920s, “big” businessmen were swayed by “enlightened” and
“progressive” ideas, one of which mistakenly held that American
prosperity was caused by the payment of high wages (rates?) instead
of the other way round. As if other countries had a lower standard
of living because their businessmen stupidly refused to quadruple
or quintuple their wage rates! By the time of the depression, then businessmen were ripe for believing that lowering wage rates
would cut “purchasing power” (consumption) and worsen the
depression (a doctrine that the Keynesians later appropriated and
embellished). To the extent that businessmen become convinced of
this economic error, they are responsible for unemployment, but
responsible, be it noted, not because they are acting “selfishly” and
“greedily” but precisely because they are trying to act “responsibly.” Insofar as government reinforces this conviction with cajolery
and threat, the government bears the primary guilt for unemployment."

Putting government intervention aside, if businessmen have motivation to do so (whatever it may be), or if workers have reasons to resist lower wages (they often do), then wages won't adjust downward efficiently.
Of course, what Austro-Punk fails to quote from America's Great Depression, is the sentence  just above the selected quote where Rothbard writes:

In a free market, wage rates will tend to adjust themselves so that there is no involuntary unemployment, i.e., so that all those desiring to work can find jobs. Generally, wage rates can only be kept above full-employment rates through coercion by government,unions, or both.
But let us for the moment ignore this important lead-in comment by Rothbard and consider the rest as a stand alone. I believe what Rothbard was trying to do is explain the extended period of high unemployment during the Great Depression. He may have been thinking of the unemployment as just one lump of people that were unemployed for the entire period of the depression, whereas, it could have been different people unemployed for different reasons at different times during the depression.

Keep in mind that unemployment was at double-digit levels from 1931 to 1940.

Rothbard had to explain this in his book and the "well people stayed out of working demanding higher wages" appears to be part of his attempt. But there are problems with this.

What if it was different people that were unemployed at different times during the Great Depression?

Consider, the first crisis was the stock market crash in October 1929 which we can attribute to the decline in the business cycle. This can explain the jump in unemployment in 1930 to 8.7% from 3.2%.

But then in 1930, Smoot-Hawley tariffs kicked in. Thus, it is obvious to see that this would have resulted in a major new source of unemployment in 1931and unemployment jumped to 15.9%

The Smoot-Hawley Act increased 900 import tariffs by an average of 40% to 48%. Hoover signed the bill into law on June 17, 1930.

Toward the end of the year, Canada, Europe, and other nations retaliated by raising tariffs on U.S. exports. As a result, exports fell from $7 billion in 1929 to $2.5 billion in 1932. Farm exports fell to a third of their 1929 level by 1933.

The Balance reports:
Global trade plummeted 65%. That made it difficult for American manufacturers to remain in business. For example, tariffs on cheap imported wool rags rose by 140%. Five hundred U.S. plants employed 60,000 workers to use the rags to make cheap clothing. U.S. auto manufacturers suffered from tariffs on 800 products they used. 
But then things got worse. Herbert Hoover signed on June 6, 1932, the Revenue Act of 1932 which raised United States tax rates across the board. The rate on top incomes was increased from 25 percent to 63 percent. The estate tax was doubled and corporate taxes were raised by almost 15 percent.

This surely, once again, shook the structure of the economy. In 1932, unemployment climbed to 23.6%.

Then in 1933, FDR's New Deal started paying farmers not to grow crops, which resulted in farmhands losing jobs. FDR also established the first minimum wage, more jobs lost. All this resulted in unemployment climbing to 24.9% in 1933.

FDR continued to monkey with the economy throughout the rest of the 1930s and the Federal Reserve had extremely erratic policy throughout the 1930s. All these distortions surely caused all kinds of new unemployment. Rothbard mentions most of these throughout his book and it is curious that he still reached in part for the "well people stayed out of working demanding higher wages" explanation.

But a moment of thought and one realizes that, absent other factors, when a person has a choice between a soup line and a lower wage, he is going to take the lower wage.

There may be some stubbornness about taking a lower wage for a few weeks or even a couple of months but it is hard to see how this would have gone on for 10 years without outside government factors distorting markets.

To think that free markets don't clear, even labor markets, is a very odd view to hold. It is, in fact, a Keynesian notion.

There is a very good dissertation paper that needs to be written here to dig into the specifics of the unemployment during the Great Depression. Was it the same people unemployed throughout? Was it different people forced into unemployment by different government interventions? How much was it really a decade of labor stubbornness? I doubt very much sticky/stubbornness would be found.

Robert Wenzel is Editor & Publisher of EconomicPolicyJournal.comand Target Liberty. He also writes EPJ Daily Alert and is author of The Fed Flunks: My Speech at the New York Federal Reserve Bankand most recently Foundations of Private Property Society Theory: Anarchism for the Civilized Person Follow him on twitter:@wenzeleconomics and on LinkedIn. His youtube series is here: Robert Wenzel Talks Economics. More about Wenzel here.


  1. http://www.polyconomics.com/memos/mm-050617.htm

    "Looking back at the history of 1929, there is no dramatic increase in the domestic tax wedge to explain the market collapse. But there is also an international wedge -- the tax on international transactions. And here there is a dramatic event, the gathering political momentum of what is now conceded to be the century's most disastrous piece of economic legislation. The Great Crash of 1929 anticipated the Smoot-Hawley Tariff Act of 1930. The calamitous declines of Monday, October 28, and Tuesday, October 29, followed immediately the collapse of the Senate coalition that had been the last barrier to the tariff..."

    RW --

    You appear to be little impressed with the Wanniski Wing of Conservative Economic Theory. I believe, however, that this analysis has value. We see this today, though the response appears attenuated. Whatever ills are found in Trump, his dangerous Trade Policy is the worst: "Fair Trade, not Free Trade, Fair Trade". Yikes!!!

    Even the Monetarist School - a Demand School of Economic Theory - is verified to an extent, and then somewhat negatively. You argue against the Austrian Lites and "The Coming CRASH!!!" using Monetarist (Friedmanite) arguments. Monetarism argues against "Fixing" Value by fiat and expanding the Money Supply using day-by-day Political Decisions made by a small number of Technocrats.

    Not even the Constitution allows that.

    If there is one consistent Argument from this, it is to be found in the Political Dictum, "Don't just do something, stand there!". The Present Value people have already made threats - "If Warren or Bernie win this thing, I'm outa' here".

    The Statists haven't won yet but they are celebrating at the sight of the finish line as they always do. Reagan knew what should have been done (See: Novak's _The Prince of Darkness_) and there's still time for Trump (but not much).

    It's not like Conservative Economics doesn't have an answer.

  2. Wenzel you fail to look at Rothbard's quote RIGHT AFTER what you chose to post. Here (Pg 43-44):

    "Occasionally, however, the wage rates are maintained by VOLUNTARY CHOICE (although the choice is usually ignorant of the consequences) or by coercion supplemented by voluntary choice. It may happen, for example, that either business firms or the workers themselves may become persuaded that maintaining wage rates artificially high is their bounden duty. Such persuasion has actually been at the root of much of the unemployment of our time, and this was particularly true in the 1929 depression." (My bold)

    So Rothbard is saying this in GENERAL TERMS that wages can be sticky downward. In fact, here's a post from yesterday on how Rothbard was confused on his "sticky wage position":


    You say: "To think that free markets don't clear, even labor markets, is a very odd view to hold. It is, in fact, a Keynesian notion."

    This is a bit odd. First, you're not distinguishing between the short-run and the long-run. In the long-run, your statement is largely accurate. In the short-run, wages and prices don't adjust quickly, efficiently, or proportionately, and there are reasons for this that have nothing to do with government intervention (employee morale, the money illusion, etc). Also "sticky wages" did not originate with Keynes, and therefore isn't "Keynesian". Henry Thornton talked about it in 1802 in his "Inquiry into the Nature and Effects of the Paper Credit of Great Britain" as well as Ralph Hawtrey over 2 decades before Keynes wrote the General Theory.