Читать книгу Out of Work - Richard K Vedder - Страница 40

By far the most important business cycle development of the first three decades of the twentieth century was the very sharp economic downturn of 1920 and 1921. Unemployment rose to the double-digit level in 1921. Since the annual rate of unemployment reached 11.7 percent, some months within that year witnessed even higher unemployment—possibly as much as 15 percent.

While the magnitude of the 1920–22 downturn was severe (and indeed exceeded that for the Great Depression of the following decade for several quarters), its duration was not. By 1922 recovery was already underway, and in the following year unemployment was actually less than its normal long-run rate. Despite movements in major components in the demand for labor, including sharp increases and then decreases in prices and money wages, the labor market adjusted reasonably quickly to disequilibrium conditions, in marked contrast to the 1929 downturn discussed in the next chapter.

The standard model with multiple lagged variables using annual data correctly predicts the rise and subsequent decline in unemployment. The model understates unemployment in 1920 rather considerably, but at least indicates a fairly sizable increase for the year (the actual unemployment rate rose 3.8 points.) Yet the model predicts very accurately the dramatic upsurge in unemployment in 1921 (calling for 12.1 percent instead of the actual rate of 11.7 percent), and the subsequent drop in 1922 and 1923 (the model somewhat underpredicts the magnitude of the decline, showing, for example, 8.6 percent unemployment for 1922 instead of the actual 6.7 percent).

Analysis of the 1920–22 downturn requires use of more detailed data than that employed in the basic model. While unemployment data are not available on a monthly or quarterly basis, factory employment data are, as are factory payroll, industrial production and wholesale price data. From these sources it is possible to discern changes in productivity in manufacturing by dividing industrial production by factory employment. This provides a measure of output per worker. To the extent that employers shortened the workweek in response to declining output, this productivity measure may misstate changing hourly output per worker. Fortunately, however, the evidence is that hourly output per worker fell only modestly in manufacturing. Data collected by the Bureau of the Census, and analyzed by pioneering statistician Willford I. King, reveal that the workweek, from peak to trough, declined slightly less than 4 percent.¹⁶ Accordingly, any bias introduced by the use of this productivity measure is relatively small.

Similarly, wages per worker are derived by dividing factory payrolls by the number of employees. Again, the relatively modest nature of changes in the workweek over time suggests that this very crude measure of employee compensation in fact is not too bad in this particular instance. For purposes of our analysis here, we averaged monthly figures to obtain quarterly estimates of the relevant variables.¹⁷

Table 4.3 reveals the trends in the major variables. Factory employment from the beginning of 1920 to the trough in the third quarter of 1921 fell slightly more than 30 percent on a seasonally adjusted basis, a sharp drop by any standard.¹⁸ Similarly, industrial production fell by a like proportion. An even steeper decline occurred with respect to wholesale prices. Between the second quarter of 1920, when they peaked, to the third quarter of 1921, a period of slightly over one year, wholesale prices fell nearly 44 percent, one of the steepest decreases recorded in American history.

The substantial fall in prices greatly exceeded the drop in money wages, so real wages rose markedly until the third quarter of 1921. It would be an overstatement, however, to characterize money wages as rigid. After all, they did fall over 19 percent from the summer of 1920 to the end of 1921. It is more accurate to say that wages proved less flexible than prices.

In no sense can the business cycle downturn of 1920–21 be attributed to a productivity decline. Only in two quarters did average output per worker fall below that at the beginning of 1920, and given the small reduction in the workweek that occurred, hourly productivity probably did not fall at all. At the low point in factory employment in the summer of 1921, output per worker was somewhat higher than when the downturn began in early 1920. Indeed, productivity was remarkably stable during the downturn, only to rise robustly during the recovery that began in the fall of 1921.

The fall in employment and the corresponding rise in unemployment is well explained by the sharp rise in the adjusted real wage, which in turn was entirely a consequence of the price deflation. As figure 4.1 illustrates, the adjusted real wage peaked in precisely the quarter when employment reached its lowest point. Note that the adjusted real wage never returned to the level prevailing at the beginning of 1920—but neither did factory employment.

TABLE 4.3 QUARTERLY EMPLOYMENT AND LABOR MARKET INDICATORS, U.S. 1920–1923

FIGURE 4.1 EMPLOYMENT AND THE ADJUSTED REAL WAGE, QUARTERLY DATA, 1920–23

A statistical examination of data similar to that in table 4.3 reveals what the figure tells us visually, namely that there is a striking and statistically significant negative correlation between the adjusted real wage and factory employment. A model regressing wholesale prices, money wages, and productivity (output per worker) against factory employment shows an expected positive relationship between price and productivity movements and employment, and a negative relationship between money-wage changes and employment. Moreover, the relationships are statistically significant and the overall explanatory power of the model is high (R² = .86).

As already noted, the root cause of the rising real wage and accompanying fall in employment was the acute price deflation. Changes in monetary variables fit the price history of the downturn reasonably well. According to Friedman and Schwartz, the money stock peaked in May 1920 at $30.3 billion (the same quarter in which prices peaked), falling by 8.9 percent to $27.8 billion by the third quarter of 1921, the same quarter in which prices reached a low point. Over the next year, prices increased by about 10 percent.¹⁹

At the same time, a monetarist explanation does not tell the entire story. The stock of money in the third quarter of 1920 was actually greater than in the first quarter, yet over 30 percent of the observed decline in factory employment had already occurred. Rising money wages in the first months of 1920 rather than falling prices seems to explain the initial employment downturn.

The decline in prices was so substantial-about as great as in the Great Depression that followed—that it seems difficult to attribute it solely to an 8 percent fall in the money stock. There was, by any measurement, a sharp decrease in the velocity of money. The American experience was similar to that in most other countries, and indeed the Federal Reserve Board actually attributed the American price decline to falling prices overseas.²⁰ Certainly the Federal Reserve’s raising discount rates twice in 1920—to a record of 7 percent that stood for over half a century—contributed to the decline in borrowings from the Federal Reserve that led to a sizable decrease in the monetary base. Unlike after 1929, there was no decline in depositor confidence, as the deposit-currency ratio actually increased. This was not sufficient, however, to offset the impact of a highly contractionary monetary policy. The Federal Reserve seemed to have failed in its first peacetime attempt at monetary and price stabilization.

The fall in the income velocity of money that accompanied this monetary policy is not too surprising in light of contemporary experience. When inflationary expectations increase, as they did during World War I and 1919, the opportunity cost of holding cash balances rises and people conserve on those balances, maintaining relatively small amounts of cash (money) for any given income. When prices fall, after having risen for many years, inflationary expectations are shattered, particularly when the long-run historical trend was for prices to remain roughly stable. Accordingly, the perceived opportunity cost of holding cash falls, and people start to increase their cash balances. Since demand deposits paid interest, and since prices in any case were falling, the real rate of return on cash balances in 1920 and 1921 was actually very high—those balances were getting more valuable daily as prices fell. Thus the deflationary impact of a decline in the stock of money was furthered by the resulting fall in velocity associated with changing expectations.