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?

Answer 1

a)Hoover's keep wages high policy was based on the classical theory of labor.The classical theory states that employment of labor in the labor market depend on the interaction of demand and supply of labor . The workers provide a constant supply of labor and the employer demand for labor.The classical economic idea is that supply creates its own demand.In the fig at point A , aggregate supply OQ1 is equal to aggregate demand OE1.When supply increases to OQ2 demand rises to OE2.So aggregate demand is equal to aggregate supply and there is no unemployment.

b)On wages , Hoover asked the major business leaders not to reduce wages in the face of rising unemployment.He believed high wages brought prosperity .He believed that if firms reduced wages the workers would not have the purchasing power to buy the goods that are produced.He believed depression caused fall in prices and if wages were cut along with it , purchasing power will remain constant.This resulted in rapidly escalating unemployment.Firms felt they will not be able to employ workers when output prices were falling and cost of labor was constant. So Hoover's policy was not able to combat unemployment.