In July 1933, FDR implemented the National Industrial Recovery Act by ordering firms to cut weekly hours from 48 to 40, while keeping nominal wages unchanged. This effectively boosted nominal hourly wages by roughly 20%, almost overnight. The stock market crashed on the announcement.
Between March and July of 1933, industrial production had soared by 57% under the influence of FDR’s dollar devaluation program. After July 1933, industrial production started declining due to the high wage costs imposed by the NIRA. When the program was repealed in May 1935, industrial production was actually lower than in July 1933. Immediately after the NIRA was repealed, industrial production began rising extremely rapidly. You don’t get more clearcut policy experiments.
But many California legislators seem unaware of the NIRA’s history. Alex Tabarrok directed me to this WSJ article:
A bill moving through the Legislature would shorten California’s normal workweek to 32 hours from 40 for companies with more than 500 employees. Workers who put in more than 32 hours in a week would have to be paid time-and-a-half. And get this: Employers would be prohibited from reducing workers’ current pay rate, so they would be paid the same for working 20% less.
That’s very similar to the failed NIRA policy of 1933.
READER COMMENTS
Andrew_FL
Apr 20 2022 at 4:28pm
Not only is it very similar to NIRA policy, it’s near identical to the policies of the French Popular Front 1936-38, and the evidence is similarly very convincing on that policy.
Richard A.
Apr 20 2022 at 4:59pm
There is a big loophole in this legislation–unionized companies are excluded. I suspect that this is a way to pressure non-unionized companies to encourage their employees to unionize.
steve
Apr 20 2022 at 9:55pm
In 1938 they cut to 44 hours and and in 1940 to 4o hours requiring overtime pay. They still had good GDP growth so it doesnt look like what happened in 1933. Why is that?
Steve
Scott Sumner
Apr 21 2022 at 2:04am
Who is “they”?
Capt. J Parker
Apr 21 2022 at 9:37am
Steve,
If you are talking about the Fair Labor Standards Act of 1938, You’re right to say that it’s passage didn’t seem to make economic conditions much worse than they already were during the 1937-1938 recession. At the time the Act passed there were also big changes happening with fiscal and monetary policy so, it’s much harder to make the case that the FLSA was a natural experiment for labor law.
Scott Sumner
Apr 21 2022 at 12:37pm
The minimum wage increases of late 1938 and late 1939 did briefly slow the recovery. But the effects of WWII were quite expansionary for industrial production after mid-1940.
Michael Rulle
Apr 21 2022 at 10:32am
I assume the California Pols believe this will help them get elected. My guess is that close to zero percent of people ever heard of NIRA and what it’s policies were, let alone it’s impact on the economy. There is also a strong belief that our country is fractured. This may be true.
Yet, in America, unemployment is in the high 3s. Net worth ($150 trillion—-household balance sheet) is 50% higher than 4 years ago (q4-2017-q4 2021), “liabilities” are the same ratio of assets as its always been (about 12-13%).
Median real Household income is at all time high and 9% higher than 4 years ago.
I admit I don’t really understand what any of this means. But looking at the numbers literally, we have never been doing so well economically—-maybe ever.
Yet everyone thinks we are in disaster mode (not the same disaster——for everyone has a different opinion). Inflation just burst onto the scene—-so that is something to worry about.
But, if we had thought this was going to be the case —-say 20 years ago—-we would have thought it would be spectacular.
Yet we think everything is horrible (not literally “everything”). One could say economic outcomes are not as important as we used to think——but I have a hard time believing this.
It is as if we want to think things are horrible——regardless of the evidence to the contrary. Definitely we have strange new beliefs——but maybe “beliefs” only seem different due to the weirdness of social media——which is just an exaggeration machine.
Kevin Corcoran
Apr 21 2022 at 11:47am
Sadly, the phenomenon you describe is not new. Alexis de Tocqueville made similar observations in his study of the French Revolution, noting that “in no one of the periods which have followed the Revolution of 1789 has the national prosperity of France augmented more rapidly than it did in the twenty years preceding that event.” To Tocqueville, it appeared that in the years leading up to the Revolution, “the French found their position the more intolerable the better it became.”
Phil H
Apr 21 2022 at 10:02pm
I think this is a real and important thing, and I’m not yet sure how to think about it.
I was thinking in terms of recent social movements: when there’s still formal, legalised structural inequality women/ethnic minorities have to fight that first. The law needs to be changed. But once the law is changed, and they find that they’re still not equal, the fight becomes more personal, and less abstract. It’s no longer a far-off piece of legislation that’s holding their salary down. That’s fixed. Now the problem is the guy next door.
In the French revolution, there are problems of knowledge and coordination that have to be overcome before you can even think about revolting, otherwise you just get slaughtered. But as life gets a *little* bit better, you solve those problems – and then the revolution comes.
So perhaps it’s just a natural process that a bit of amelioration leads first to a heightening of tension… and then ultimately the problem goes away. Or, much more pessimistically, perhaps people don’t have a clue about the general state of things (fair or not fair? good or not good?) and are just good at reading trends. If the trend right now is for things to be getting more fair, then we see that opening and grasp for more and more and more, and it’s just an endless greedy cycle that only ends with someone getting walloped.
Mark Z
Apr 21 2022 at 11:08pm
I imagine this phenomenon has the same root as the fact whereas our grandparents didn’t think seatbelts were worthwhile, we think they’re legally necessary. As people hedonically adapt to better outcomes, they adjust their expectations, so discontentment doesn’t decline in the long run, no matter how good things get.
Michael Rulle
Apr 22 2022 at 9:40am
Interesting comment you plucked from Tocqueville!
Aaron
Apr 21 2022 at 2:19pm
In your comment you say, “Median real Household income is at all time high and 9% higher than 4 years ago.”
Could you elaborate where this is coming from?
When I look at FRED (https://fred.stlouisfed.org/series/MEHOINUSA672N), it only has data through 2020 and it shows a peak of household income in 2019 and a decrease in 2020. When I look at the Census Bureau, I also only saw data through 2020.
In addition, I think this post by Josh Barro goes through some of the reasons why some people don’t think that “we have never been doing so well economically—-maybe ever.”
https://www.joshbarro.com/p/right-now-inflation-matters-more?s=r
Michael Rulle
Apr 22 2022 at 9:50am
HUD (huduser.com) has different method and higher numbers ——-biased upward—-but 2021 estimate 79.9 versus 2017 69K.
I got my numbers from seekingalpha.com—-estimates of course. Also from zippia.com
FRED is always late—-they prefer being closer to the true number—-which does change over a few years with updates
Household net worth really blows my mind. That is from the Fed.
Michael Rulle
Apr 22 2022 at 9:55am
Hi Aaron. 3 places
seekingalpha.com
HUD—(they use different method—-biased up—-2017-2021 went from 69-79.9)
Zippia.com
all are estimates—-as is FRED.
Michael Sandifer
Apr 21 2022 at 9:07pm
Such a policy might not be a terrible idea, absent the effective hourly wage increase. Unfortunately, it does seem to reflect a basis misunderstanding of economics, and together with the 32 hour work week, will represent a large negative shock to California’s economy.
I do think the 32 hour work week is an idea whose time is arriving. I’ve been saying this for years.
MarkW
Apr 22 2022 at 3:59pm
It’s not just arriving — it’s been here for decades. Most of my wife’s (predominantly female) in her medical field, throughout her career have worked 4 days weeks and accepted the commensurately lower salaries to do it. My wife has been the full-time oddball in the department. The point is that there have long been occupations where less than full time work is possible. If that’s what you want, choose an occupation accordingly.
Michael Sandifer
Apr 21 2022 at 9:15pm
I think this is part of a broader desire of Americans to have a more western European-style welfare state. Many conservatives want a nationalist version of this, a la Marine Le Pen. They will never call it what it is though. Many liberals want what they see as more democratic socialism. Many in the middle are generally amenable to more welfare benefits.
Michael Sandifer
Apr 21 2022 at 9:17pm
And I should say that I understand this isn’t a “welfare policy”, but it goes along with a general desire for less work and more income for a broad spectrum of society. Entertainment options are much better than they used to be.
Mark Z
Apr 21 2022 at 10:59pm
I don’t think there is such a broad desire for a more European style welfare state. Polls show support for smaller government going up in recent years, and though polls often find Americans want more free things, they usually also find they don’t want to pay for them, a pretty ambiguous result that is often selectively misinterpreted.
I also don’t see why a desire to work less justifies state-imposed work maxima. I’ve seen people suggest there’s some coordination problem that prevents people from working less even though most want to, so only a work hour ceiling could realize this preference (for which the evidence that average person actually want to trade wages for leisure time seems lacking), but the data contradict this theory: there’s a consistent trend across developed countries including the US of hours worked per year declining as countries become wealthier. Hours worked actually do decline organically without regulation as nations become wealthier.
steve
Apr 22 2022 at 11:01am
The polls generally seem to say, as I read them, that people want to pay less in taxes. Its not always so clear that they want to cut actual spending. They might, for example, want to cut spending on welfare but increase spending on the military since they seem tot think that is not government.
Steve
Michael Sandifer
Apr 22 2022 at 1:10pm
You can’t take simple polls on complex policy matters seriously. Polling would have to include not only all relevant details of the policy under consideration, but also absolute and relative cost, and how it will be financed. When are such questions ever framed in the total context of the decision to be made, including tradeoffs? Also, there are often sampling errors, and some just aren’t honest when they answer polls, as polls of Trump supporters have taught us.
Instead, I look at revealed preference. What are politicians that voters elect actually doing? They’re offering more welfare-style benefits, at lower average tax rates. So, from this perspective, voters want more benefits at lower cost now, and don’t mind running deficits to finance them.
Mark Z
Apr 22 2022 at 6:04pm
Efforts by politicians to expand welfare benefits haven’t been very successful in recent years, so I would say revealed preferences suggest it’s a wash.
Andrew_FL
Apr 23 2022 at 9:39am
You can’t use revealed preference the way you are trying to here
Arqiduka
Apr 22 2022 at 5:25am
One can argue that “an hour is an hour” in a pre-automation industrial setting, hence that policy really boosted real costs.
Maybe in a service-based setting, you really can get about the same amount of work in marginally fewer hours, so it could be closer to a wash. I know, “this time it’s different”.
Michael Rulle
Apr 22 2022 at 10:54am
The increase of median household income from 2017-2021 is about 10-15%
seekingalpha.com
HUD https://www.huduser.gov/portal/datasets/il/il21/Medians2021.pdf
Mark Brophy
Apr 28 2022 at 10:31am
California schools don’t teach economic history.
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