The prevailing popular ideology was the “new idea” that instead of employers cutting wages to get out of a recession, they would keep wage rates the same to “boost consumption” and keep demand for their products strong. You also have to remember that during the 20s people thought Ford was sucessful because he had raised wages high enough for his employees to “buy back the product”. They thought that high wages caused prosperity. We know that this idea is economically fallicious, the greater savings and entrepreneurial skill of Ford is what really caused the wages to rise. His savings and new technologically efficient processes boosted Marginal physical product schedules and hence their wages. In addition, the increasing supply of cars hitting the market lowered their prices and further raised the real wages of the employees.
During the Depression, the employers didn’t really have a choice at the beginning. If the refused to maintain wage rates, they would face the wrath of Hoover (who threatened force) as well as general dismay from the business community. As the Great Depression lingered on, businessmen started to realize the futility of what they were doing and attempted to cut wages. Hoover criticized them for breaking the code. Even in 32 when businessmen were forced to cut wages as they couldn’t afford to keep paying them, prices fell faster than the wage cuts and real wages still rose.
@nirgrahamUK : Thanks for the link to that paper. It was interesting.
@Gabriel Godinho: If one had a president who wanted wages raised facing a host of completely free-market businessmen who supported the “liquidate labor” advice, things might have been different. In reality, Presidential power is not the sole factor, but one factor. Hoover was not alone in thinking high-wages were a solution, some respected economists, newspapers and businessmen thought so too. Also, it is wrong to think of businessmen as pure profit-maximizing machines. They are people too, and their own moral and political ideology often plays an important role in their decisions. In such an environment, when a president calls a lot of business people to the White house and makes an appeal to them, and where some of them support his theory, and some of them think it might be the moral thing to do even if they have to take a few years of pain, then doubters can sometimes be convinced to be team players at least for a while.
Also, if one reads some histories of the times, many people were taking very seriously communism’s boasts that they would beat the Capitalist systems. Labor unions were becoming stronger and many businessmen thought that the pragmatic thing to do was to make some type of structural peace with labor and unions, in order to head off further radicalization. Such considerations could also have played a role.
I can accept that businessman decided to not lower wages for all the reasons you pointed. What I cannot understand is how they fired people at the same time, since the reasons to not lower wages would apply to not firing people aswell.
“During the Depression, the employers didn’t really have a choice at the beginning. If the refused to maintain wage rates, they would face the wrath of Hoover (who threatened force) as well as general dismay from the business community. As the Great Depression lingered on, businessmen started to realize the futility of what they were doing and attempted to cut wages. Hoover criticized them for breaking the code. Even in 32 when businessmen were forced to cut wages as they couldn’t afford to keep paying them, prices fell faster than the wage cuts and real wages still rose.”
If there was such a decision of cuting wages by businessman, why the persisting unemployment during the whole decade? Would not the market simply redistribute the workforce and reajust wages fastly (such as in 1920-21) without minimun wage laws?
In 1932 when businessmen started to really cut wages, the price level fell faster, so real wages rose and labor became even more expensive. During Roosevelt’s presidency, unemployment was a still a problem because government was crowding out private investment (private investment shrank during the so called Roosevelt recovery). The real wages did go down because of inflation, but not enough to compensate for the lack of business growth due to New Deal intervention. And in 37-38 unemployment shot back up when the government instituted new labor laws (the Wagner act was verified by the Supreme Court, minimum wage law, and Social Security verified).