The Minimum Wage Makes Depressions Worse

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

When Maryland governor Martin O'Malley signed a minimum wage of $10.10 an hour into law this week, U.S. labor secretary Tom Perez argued that a higher wage would help growth in Maryland, saying "it's good for the economy." The governor's press release supplied the context: Maryland needs help so badly because the state has "faced the worst national recession since the Great Depression."

Nor are Maryland politicians alone in working the Great Depression angle. Vice President Joe Biden likes to hold up for ridicule current critics of the minimum wage by pointing to the foolish negative reaction to the formal introduction of a federal statutory wage, back in 1938. "Now at the time," Biden has said, in reference to the 1930s, "many said this would lead to job losses. Seriously."

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.

Politicians who followed Ford but had not yet heard of John Maynard Keynes thought the same high-wage policy might work across the economy. 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. Ford actually committed to raising pay, to $7 a day from $6. Within two years Hoover also signed the Davis-Bacon Act, which mandated that government offices fulfilling construction contracts in various regions pay the "prevailing wage" for the workmen's trade and for the region. The act put additional upward pressure on wages at a time when the economy could ill afford that. Unemployment abided and rose, rather than disappearing, as it had in a depression of the early 1920s.

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. There was an interruption when in 1935 the Supreme Court held Roosevelt's NRA unconstitutional, mostly for reasons unrelated to wage rates. But 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. In real terms, wages were higher than the overall economic trend for the rest of the century. They were sometimes higher than in "socialist" Europe. Wages in the 1930s were even higher than John L. Lewis himself imagined, because the decade saw currency deflation. 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.

After the Fair Labor Standards Act, Roosevelt shrugged and turned to studying Europe's conflicts. The 1938 midterms saw the Republicans making some gains, and the general sense was that the New Deal had run its course. If you really want to evaluate high-wage policy from the Depression, you have to look at all the laws and policies, not merely the Fair Labor Standards Act in isolation.

The cost of labor matters these days, too. It's worth all of our while, therefore, to hear out the National Retail Federation or companies that are fighting to halt efforts to hike the minimum wage at the federal level to Maryland's $10.10. The Great Depression was not caused by labor policy alone, just as our troubles today are not caused by one policy or the other alone.

Still, 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.

© Copyright 2014 National Review

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