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Hoover's Big Labor Policies Caused Great Depression

Posted By Conn Carroll On September 2, 2009 @ 11:17 am In Economics | Comments Disabled

The University of California at Los Angeles reports [1]:

Pro-labor policies pushed by President Herbert Hoover after the stock market crash of 1929 accounted for close to two-thirds of the drop in the nation’s gross domestic product over the two years that followed, causing what might otherwise have been a bad recession to slip into the Great Depression, a UCLA economist concludes in a new study.

“These findings suggest that the recession was three times worse — at a minimum — than it would otherwise have been, because of Hoover,” said Lee E. Ohanian, a UCLA professor of economics.

The policies, which included both propping up wages and encouraging job-sharing, also accounted for more than two-thirds of the precipitous decline in hours worked in the manufacturing sector, which was much harder hit initially than the agricultural sector, according to Ohanian.

“By keeping industrial wages too high, Hoover sharply depressed employment beyond where it otherwise would have been, and that act drove down the overall gross national product,” Ohanian said. “His policy was the single most important event in precipitating the Great Depression.”

Unfortunately big labor has only increased their power in Washington since Hoover’s time. Heritage fellow James Sherk recently detailed How Labor Unions Affect Jobs and the Economy [2]:

Unions Compress Worker’s Wages: Unions want employees to view the union–not their individual achievements–as the source of their economic gains (without the union, workers wouldn’t get “fair share”). As a result, union contracts typically base pay and promotions on seniority or detailed union job classifications. Unions rarely allow employers to base pay on individual performance or promote workers on the basis of individual ability. Consequently, union contracts suppress the wages of more productive workers and raise the wages of the less competent. They may raise the overall wages of workers as a whole, but mostly unions just redistribute wealth between workers.

Unions Kill Jobs: By eating up 10 to 15 percent of a firms profit, unions both make undertaking new investments less worthwhile and reduce the money that firms have available for new investments. Over time, this makes unionized firms less competitive. Consider the manufacturing industry. Most Americans take it as fact that manufacturing jobs have decreased over the past 30 years. However, that is not fully accurate. Unionized manufacturing jobs fell by 75 percent between 1977 and 2008. Non-union manufacturing employment increased by 6 percent over that time. In the aggregate, only unionized manufacturing jobs have disappeared from the economy [3]. This pattern holds across many industries. Union jobs have disappeared especially quickly in industries where unions win the highest relative wages. [4]

Unions Slow Economic Recovery By raising their member’s overall compensation, unions reduce business investment and the overall number of jobs in an industry. Economists have found that states with more union members took considerably longer than those with fewer union members to recover from the 1982 and 1991 recessions. [5]

Sherk concludes: [2]

Unions are labor cartels. Cartels work by restricting the supply of what they produce so that consumers will have to pay higher prices for it. OPEC, the best-known cartel, attempts to raise the price of oil by cutting oil production. As labor cartels, unions attempt to monopolize the labor supplied to a company or an industry in order to force employers to pay higher wages. In this respect, they function like any other cartel and have the same effects on the economy. Cartels benefit their members in the short run and harm the overall economy.


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URL to article: http://blog.heritage.org/2009/09/02/hoovers-big-labor-policies-caused-great-depression/

URLs in this post:

[1] reports: http://newsroom.ucla.edu/portal/ucla/pandering-to-labor-caused-great-91447.aspx

[2] How Labor Unions Affect Jobs and the Economy: http://www.heritage.org/Research/Labor/bg2775.cfm

[3] In the aggregate, only unionized manufacturing jobs have disappeared from the economy: http://www.heritage.org/Research/Labor/bg2775.cfm#_ftn24

[4] Union jobs have disappeared especially quickly in industries where unions win the highest relative wages.: http://www.heritage.org/Research/Labor/bg2775.cfm#_ftn27

[5] states with more union members took considerably longer than those with fewer union members to recover from the 1982 and 1991 recessions.: http://www.heritage.org/Research/Labor/bg2775.cfm#_ftn34

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