..Hoover's views on wage policy, and his interpretation of the fact that high wages and prosperity go hand in hand, also were different. A number of economists today interpret high real wages as reflecting high worker productivity that results from a skilled labor force working with a large stock of capital and efficient technologies. In other words, worker productivity drives real wages and prosperity. But Hoover interpreted this correlation differently and believed that increasing wages in and of themselves were important for promoting prosperity, while he apparently discounted the impact of raising wages above worker productivity on business hiring decisions.
Hoover's policy views set the stage for meetings he held at the White House with major industry in late 1929 that included General Motors ( GMGMQ.PK - news - people ), Ford ( F - news - people ), U.S. Steel ( X - news - people ) and DuPont ( DD - news - people ), and advised them not to cut wages. Hoover told industry that maintaining wage levels would minimize the severity of a downturn and help him keep peace with labor. Hoover then asked labor leaders not to strike and to withdraw requests for higher wages. Following these meetings, industry publicly acknowledged their compliance with Hoover's wage program as they held wage rates fixed.
But declining prices and productivity, coupled with Hoover's program of fixing wages, significantly increased industrial labor costs. Shortly after Hoover's meetings, the industrial sector began to contract rapidly. Between October 1929 and September 1930, industrial hours worked had declined by nearly 30%. Thus, the industrial sector was severely depressed about a year into the Depression, before most of the large declines in the money supply emphasized by Milton Friedman and Anna Schwartz, and before most of the banking panics emphasized by Federal Reserve Chair Ben Bernanke.
As the industrial decline intensified, industry leaders asked Hoover if he would support wage cuts that were proportional to the deflation that had occurred. But Hoover did not support industry requests, despite increasing criticism from various quarters that his program was keeping wages far above their market-clearing levels....