Question

During the early part of the Great Depression, President Hoover called many prominent businessmen to the White House and pressured them not to cut wages for their workers. Keeping wages high, the president thought, would ensure that workers had sufficient purchasing power to continue regular expenditures. This would supposedly prevent the economy from worsening, which would stop unemployment from rising.

a. Conduct a graphical analysis of Hoover’s “keep wages high” policy. Label all axes, curves, and important points.

b. Given your analysis above, was Hoover’s policy an effective means of combating unemployment? Why or why not?

During the early part of the Great Depression, President Hoover called many prominent businessmen to the White House and pressured them not to cut wages for their workers. Keeping wages high, the president thought, would ensure that workers had sufficient purchasing power to continue regular expenditures. This would supposedly prevent the economy from worsening, which would stop unemployment from rising a. Conduct a graphical analysis of Hoover's "keep wages high" policy. Label all axes, curves, and important points. b. Given your analysis above, was Hoover's policy an effective means of combating unemployment? Why or why not?

Answer 1

A. Hoover's high wage policy was based on the classical view of labour employment. As per classical theorists, equilibrium real wage rate is determined at the level where demand for labour is equal to supply of labour. As per the diagram below, the equilibrium level of real wage rate is determined at the W/P0 as at this point demand for labour is equal to supply of labor. If anyhow the real wage rate displaces from the equilibrium condition, the market forces will again restore it to equilibrium.

But when Hoover proclaimed not to cut wages caused an increase in supply of labour as high wages attracts employment and purchasing power of income earned by labour was not reduced, But this could not curb depression. The reasons are explained in part b of the answer.

          

Unemployment W/P Excess Demand D N, Employment

B. Hoover may have maintained for a short span but, amid falling prices of goods and services businessmen were not able to earn profits and this discouraged them from hiring labour at nominal wages that were kept high. Consequently, despite keeping wages high unemployment prevailed and depression got deepened and therefore merely keeping wages high without any other fiscal intervention to increase aggregate demand did not serve the purspose . Had Hoover intervened with the demand side to control the deflationary conditions, high wage policy would have rendered quite effective in combating depression.