The Behavior of the Labor Market between Schechter (1935) and Jones & Laughlin (1937)

By Neumann, Todd C.; Taylor, Jason E. et al. | The Cato Journal, Fall 2012 | Go to article overview

The Behavior of the Labor Market between Schechter (1935) and Jones & Laughlin (1937)


Neumann, Todd C., Taylor, Jason E., Taylor, Jerry L., The Cato Journal


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. …

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