Wage Theory, New Deal Labor Policy, and the Great Depression: Were Government and Unions to Blame?

Abstract

A growing number of economists blame the length and severity of the Great Depression on factors that rigidified wage rates, raised production costs, and interfered with the market allocation of labor. The target of their critique is President Franklin Roosevelt's New Deal labor program, which they portray as creating a series of large negative supply shocks through encouragement of unions, minimum wages, unemployment insurance, and other anticompetitive industrial relations practices. The author uses a combination of institutiognal and Keynesian theory to present the other side of the story. Drawing principally from the works of J. R. Commons and J. M. Keynes, he develops both a spending and a productivity rationale for stable wages during the Great Depression and demonstrates that the New Deal's interventionist labor program was on balance necessary and beneficial. He also highlights the neglected macro-economic dimension of industrial relations theory and policy.