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Christopher Hanes on New Deal wage shocks

Summary:
George Selgin has a couple of new posts on the 1937-38 depression, which are part of his excellent series on the New Deal. I cannot find anything significant with which to disagree. He directed me to a new paper by Christopher Hanes, which studies the impact of New Deal policies on the labor market. Here’s the abstract: Wage inflation surged in the 1930s though unemployment remained high and output below trend—an anomaly in terms of the usual “Phillips curve” relationship. Proposed explanations include New Deal labor policies, hysteresis in unemployment, downward nominal wage rigidity, and a new Keynesian expectational mechanism through which Roosevelt’s monetary policies would have boosted real activity and created anomalous inflation by raising the expected future

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George Selgin has a couple of new posts on the 1937-38 depression, which are part of his excellent series on the New Deal. I cannot find anything significant with which to disagree. He directed me to a new paper by Christopher Hanes, which studies the impact of New Deal policies on the labor market. Here’s the abstract:

Wage inflation surged in the 1930s though unemployment remained high and output below trend—an anomaly in terms of the usual “Phillips curve” relationship. Proposed explanations include New Deal labor policies, hysteresis in unemployment, downward nominal wage rigidity, and a new Keynesian expectational mechanism through which Roosevelt’s monetary policies would have boosted real activity and created anomalous inflation by raising the expected future price level. I find that labor policies fully explain 1930s wage inflation anomalies. Thus the 1930s United States should not be cited as evidence for the new Keynesian expectations mechanism, hysteresis in unemployment, or downward nominal wage rigidity.

This confirms what I suggested in The Midas Paradox, but Hanes justifies the claim with econometric analysis. This graph from the paper shows the NRA wage shock of late 1933, and then another wage shock associated with the post-Wagner Act unionization drives of 1936-37, relative to the path of wages predicted in the absence of labor policy changes:

Christopher Hanes on New Deal wage shocks

Here’s a “cinematic” presentation of the policy implications:

PS. Off topic, David Shor is one of our best political analysts.


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Scott Sumner
Scott B. Sumner is Research Fellow at the Independent Institute, the Director of the Program on Monetary Policy at the Mercatus Center at George Mason University and an economist who teaches at Bentley University in Waltham, Massachusetts. His economics blog, The Money Illusion, popularized the idea of nominal GDP targeting, which says that the Fed should target nominal GDP—i.e., real GDP growth plus the rate of inflation—to better "induce the correct level of business investment".

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