Hey guys, I was reading up on general business cycle theory and the Great Depression (notably the 1937 downturn). While Keynesian say that the downturn was caused by decreases in deficit spending, Austrians say that the main cause was the increase in real wages with the pro union legislation in 1936. I don't quite understand the whole Austrians Unemployment theory and the increases in real wages stuff. Aren't increases in real wages a good thing? What makes them bad in these cases? Do Austrians say that high unemployment is always caused by wage disequilibrium?
It would be a great help if someone could explain this to me. Thanks.
This isn't a uniquely Austrian argument. Neoclassicals (most of whom are Keynesians, monetarists, and new classicals in the macro world) argue this as well. If I am able to pay my workers $100 an hour and I hire 10 workers, I pay them, on average, $10 each. Now, if governments or unions mandate that I raise the wage to $20 and hour, I can no longer hire 10 workers. I only have $100 an hour to pay workers but I have to pay 10 workers $20/hour. The obvious solution for me is to cut down on the amount of workers I have, leaving only the best and most skilled who are able to earn me more in profits than what I pay them. This means that the low-skilled and unksilled workers who need on the job experience get canned for the benefit of politicians, union bosses, and skilled workers.
In a free market, however, real wage increases are a good thing. Real wage increases occur when people save more, providing more money which entreprenuers can borrow and thus buy machinery and factories, thereby lowering prices, increasing demand, thus increasing profits. This increase in profits allows the entrepreneurs to slowly bid up wages since they have more money with which to pay workers.
Political Atheists Blog
RAFPAT:Thanks for the reply. What I meant is that businesses in late 1931 finally started to lower wages, yet the unemployment still increased. Is this because real wages still increased due to the extreme decline of prices?
There other issues other than business' slow lowering of wages. In 1932, Hoover increased taxes and continued to spend on public works (which took money from the private sector), and began to increase welfare programs. Furthermore, the amount at which wages were lowered was not what it would have been had businesses been allowed to flexibly respond to losses; wage decreases were slow. Then, FDR instituted the minimum wage as a price floor for labor, and intervened in other ways, which continued to make it hard for businesses to recover and increase employment.
I have hosted those two articles on my server. They will be up for all of tomorrow, and then I'll delete them.
http://economicthought.net/articles/Federal%20Reserve%20Policy%20and%20The%20Recession%20of%201937-1938.pdf
http://economicthought.net/articles/The%20Recession%20of%201937-38.pdf