The Behavior of the Labor Market between Schechter (1935) and Jones & Laughlin (1937)

Recent research on the Great Depression emphasizes the role New Deal economic policy played in slowing recovery. Policies promoting cartels and higher wage rates during a time that the economy was experiencing unprecedented unemployment were likely to have created a negative supply shock that exacerbated economic depression rather than helped to alleviate it. Still, for 22 months between two important Supreme Court rulings, labor and product markets were relatively free of intervention. In A.L.A. Schechter Poultry Corp. v. United States (May 1935), the Court ruled that the National Industrial Recovery Act of 1933 (NIRA) was unconstitutional. In addition to setting up industry cartels, the NIRA had imposed relatively high minimum hourly wage rates and restrictions on workweeks and required firms to recognize the right of labor to organize.The National Labor Relations Act (NLRA), better known as the Wagner Act, was passed shortly after the Schechter ruling as a means of keeping one of the key labor provisions of the NIRA in place — the legal right of labor to bargain collectively. The Wagner Act had little or no effect, however, because it was widely expected that it too would be ruled unconstitutional. In April 1937, after President Franklin D. Roosevelt threatened to pack the Court with six more judges who would be friendly to his policies, the Court surprisingly upheld the constitutionality of the NLRA with its 5-4 decision in National Labor Relations Board v. Jones & Laughlin Steel. A large wave of union activity followed the ruling and average real hourly earnings rose dramatically.Increases in equilibrium wage rates are the desirable by-product of rising worker productivity, but policy-driven wage increases, such as those that followed the NIRA and NLRA, would be expected to exacerbate the unemployment problem in a depressed economy. In fact, the economy experienced significant recovery between May 1935 and April 1937, only to falter again in the months that followed. In this article, we perform an empirical analysis to determine whether the different movements in labor input, output, and real wage rates between policy regimes persists when controlling for changes in fiscal and monetary policy. Our results suggest that the recovery that occurred between Schechter and Jones & Laughlin was indeed related to the absence of the harmful policies that preceded and followed those decisions