Out of Work. Richard K Vedder
U.S. Department of Commerce, Bureau of the Census, Historical Statistics of the United States, Colonial Times to 1970 (Washington, D.C.: Government Printing Office, 1975), p. 135, or Stanley Lebergott, Manpower in Economic Growth: The American Record Since 1800 (New York: McGraw-Hill, 1964).
6. See Christina Romer, “Spurious Volatility in Historical Unemployment Data,” Journal of Political Economy 94 (1986): 1–37. See also related papers, “Is the Stabilization of the Postwar Economy a Figment of the Data?” American Economic Review 76 (1986), 314–34, and “New Estimates of Prewar Gross National Product and Unemployment,” Journal of Economic History, 46 (1986), 341–52. Romer’s estimates suggest that the standard deviation on the unemployment rate was 1.23 from 1900 to 1929, compared with 2.29 using the official BLS data. For the 1950–79 period, the official estimates yield a standard deviation of 1.37, compared with over 2.00 using the Romer numbers. Romer’s work has been criticized. See, for example, David R. Weir, “The Reliability of Historical Macroeconomic Data for Comparing Cyclical Stability,” Journal of Economic History 46 (1986): 353–65.
7. An important step in filling this void has been provided by John J. Wallis in his “Employment in the Great Depression: New Data and Hypotheses,” Explorations in Economic History 26 (1989): 45–72. Wallis reports employment (not unemployment) changes by state for the critical Depression decade.
8. See the U.S. Department of Commerce and Labor, Bureau of the Census, Special Reports: Occupations at the Twelfth Census (Washington, D.C.: Government Printing Office, 1904), p. ccxxxiv.
9. Ibid.
10. First, we calculated the average duration of unemployment during the previous year for the two racial groups, performing a linear interpolation within the three categories of duration reported in the census. We then calculated the number of unemployed per worker-year of unemployment by dividing the number 12 (representing months) by the estimated mean unemployment duration. Next we divided the reported number of unemployed by the estimated number of unemployed per worker-year. For the entire population, the resulting unemployment rate of 5.68 percent is between the 6.5 percent rate reported by Lebergott for 1899 and the 5.0 percent rate for 1900—some of the unemployment measured in the census occurred in 1899, some in 1900. See Historical Statistics of the United States, p. 135.
11. For example, looking at males with less than an eighth-grade education, both whites and blacks had 84 percent of the work-age population employed in 1940. By 1985, the proportion for blacks had fallen dramatically, to 53 percent, while the decline for whites, to 76 percent, was much less substantial. See Gerald D. Jaynes, “The Labor Market Status of Black Americans: 1939–1985,” Journal of Economic Perspectives 4 (1990): 16.
2
Unemployment in Theory
With the increased interest in unemployment came intense scholarly investigation into its causes. Whereas in the nineteenth century economists were concerned about the gains from trade, the determination of prices and quantities, and optimal production levels for firms in alternative market structures, over much of the twentieth century the dominant single interest in economics was the question of the determinants of unemployment. Indeed, a whole new branch of economics, “macroeconomics,” developed.
Economists since John Maynard Keynes (who died in 1946) generally accept Keynes’s interpretation of what he termed the “classical” economists’ position on unemployment.1 Actually, the use of the term “classical” is somewhat inappropriate, since the “classical” economists are generally considered to have written in the period from 1776 to about 1850 or 1860. A postclassical school, developing “neoclassical economics,” began around 1870, dominated economic thinking to about 1930, and remains important today; and the unemployment theory that Keynes attacked was essentially a neoclassical theory. Roughly simultaneously with the neoclassical developments, a second school of economists, the Austrians, was developing on the European continent. While the Austrian position on business cycles differed from neoclassical thinking, the Austrians reached many similar conclusions with respect to unemployment determination. Thus we can talk of a “neoclassical-Austrian” perspective on unemployment.
Wage-Based Perspectives on Unemployment
At the outset, it should be stated emphatically that in his General Theory Keynes created a straw man, a caricature of true thinking by the orthodox neoclassical and Austrian writers of his time. Keynes implied that these economists had a well-developed and articulated theory of unemployment that was virtually universally accepted as part of orthodox economic doctrine. That assertion is somewhat dubious. To be sure, the accepted price theory carried with it an implicit explanation of unemployment. As mentioned in the previous chapter, however, there was very little explicit scholarly writing about unemployment before 1930, and textbooks of the era generally gave scant attention to the subject. Moreover, when the Great Depression began and businesses, under government prodding, began to follow policies antithetical to those that the theory of orthodox economists suggested, there was little outcry from that group. This was in marked contrast to their behavior with respect to the increased tariffs passed as part of the Smoot-Hawley Act.2 While there was an orthodox economic explanation of unemployment, a majority of economists did not believe it with the great conviction they felt about other parts of conventional economic doctrine.
With this caveat in mind, what was the predominant view of the causes of unemployment during the first three decades of the century? In short, the important determinant of unemployment is the wage rate. Unemployment is created when existing wage rates exceed the level necessary to “clear” the labor market. Just as a surplus of wheat exists if the prevailing price is above the equilibrium level that equates the quantity supplied and the quantity demanded, so there is a surplus of labor—unemployment—when the prevailing price, or wage, of labor exceeds the equilibrium level that eliminates unemployment.
Figure 2.1 can help further elucidate the theory. The quantity demanded of labor varies inversely with its price. At lower wages, the quantity demanded is greater, because the additional revenue a worker brings to a firm, or marginal revenue product, is lower the greater the quantity of labor.3 Put differently, lowering the wage makes it profitable to hire some workers whom it would be unprofitable to hire at a higher wage.
It is generally acknowledged, as figure 2.1 depicts, that the quantity of labor supplied varies directly with its price.4 As employers raise wages, some persons are willing to work who would forego the opportunity at a lower wage.
Suppose that initially the wage rate is OW, and the demand for labor is denoted by curve D. Note that at wage OW the quantity of labor supplied exceeds the quantity of labor demanded; there is unemployment in the amount AB. The basic price theory suggests that there are four ways in which the unemployment might be eliminated:
FIGURE 2.1 WAGES AND THE DETERMINATION OF UNEMPLOYMENT
1) a reduction in the existing money wage from level OW to OY;
2) an increase in labor demand (e.g., to curve D*) from higher prices on goods that workers produce; this raises the money value of the marginal revenue product of labor;
3) an increase in the demand for labor arising from an increase in labor productivity, reflecting technological advances, increased capital availability, etc;
4) a decrease in the supply of labor, denoted by an upward movement in the supply curve (not shown in figure 2.1).
A