Amity Shlaes: The Minimum Wage Makes Depressions Worse

Amity Shlaes writing at the National Review online:

Joe Biden thinks it helped end the Great Depression. It actually extended it.

The vice president has it exactly backward.

Many of us have always suspected that upward pressure on wages in the 1930s can’t have made it easier to hire.

But only lately, in the last 10 or 15 years, has newer research formed a complete picture of what happened in the 1930s.

It seems that the policy of upward pressure on wages, which is the idea of the minimum wage, made the Depression worse.

Here’s what happened. Back in the teens and ’20s, an era of technocrats and progressives, employers dropped wages in downturns — heck, that was better than laying people off. But employers wondered aloud whether higher wages would be good for business.

The most famous of these was Henry Ford, who paid above market level on the theory that workers would use any extra money to “buy back the car.” In an individual business this can be true, especially when that business is simultaneously introducing technology, such as the Ford assembly line, that radically increases productivity...

President Herbert Hoover liked the idea enough that within months of the 1929 crash he hauled business leaders to Washington to browbeat them into sustaining higher wages...

Franklin Roosevelt codified the pressure further with the National Industrial Recovery Act, whose codes contained minimum wages for various trades. Now even private companies that were not government contractors had to pay more than they could afford.

...within months Roosevelt signed the Wagner Act, which gave labor the power to terrify closed-shop business and even carry out occupations of business premises (this latter action bearing the euphemism “sit-down strike”). Employers offered higher wages or paid for their refusal with violent strikes. John L. Lewis, the militant labor leader, terrified even Ford into accepting unionization.

As if the Wagner Act were not enough, a new law, the Fair Labor Standards Act of 1938, re-codified the minimum wage across trades.

The result, as scholars Lee Ohanian, Harold Cole, and others have discovered, is a tragic perversity.

In a depression, when employers were losing money, wages were too high... Reducing wages, the old lesser evil chosen by employers in troubled times, would not be sanctioned by the powerful New Dealers in Washington.

So employers often laid people off — hence the mostly double-digit unemployment of the 1930s.

Vice President Biden’s choice of 1938 as subject is no accident. In the very late 1930s, unemployment did drop, though not down to anywhere near acceptable levels. If you want, you can tell yourself this drop was caused by the 1938 Fair Labor Standards Act. But this drop came in good part because the New Deal was running out of steam.

...the record from the Great Depression suggests that upward pressure on wages really can hurt the country. Seriously.

— Amity Shlaes chairs the board of the Calvin Coolidge Presidential Foundation.
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Link: http://www.nationalreview.com/article/377435/minimum-wage-makes-depressions-worse-amity-shlaes