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Out of Work
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Out of Work
Unemployment and Government in Twentieth-Century America
Lowell E. Gallaway (Author), Richard K. Vedder (Author), Martin Bronfenbrenner (Foreword)

Paperback • 408 pages • 31 figures • 48 tables • 6 x 9 inches

ISBN-13: 978-0-81478-792-2

Launch Date: 1/1/1993

Publisher: New York University Press for The Independent Institute

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Overview

Unemployment is used to justify every bigger government programs—from national industrial policies to high military expenditures to a return to New Deal-type “make work” projects. Now, this book relentlessly amasses devastating evidence that the major cause of high unemployment, both cyclical and secular, is government itself.

The authors boldly challenge Keynesian fiscal demand-management and show that such policies as minimum wages, labor controls, unemployment compensation, and welfare have played significant roles in generating joblessness. This book lucidly recounts the history of American unemployment, showing that the policies of both President Hoover and President Roosevelt prolonged and exacerbated unemployment during the Great Depression.

Here is a powerful rebuttal to the prevailing myths about unemployment and the government’s role in combating it. And it also points the way toward reforms that would have a meaningful, lasting impact on unemployment in the United States.

Contents

Table of Contents

  • Chapter 1: The Unemployment Century
  • Chapter 2: Unemployment in Theory
  • Chapter 3: The Neoclasssical/Austrian Approach
  • Chapter 4: The Gilded Age
  • Chapter 5: From New Era to New Deal
  • Chapter 6: The Banking Crisis and the Labor Market
  • Chapter 7: The New Deal
  • Chapter 8: The Impossible Dream Come True
  • Chapter 9: The Gentle Time
  • Chapter 10: The Camelot Years
  • Chapter 11: “Pride Goeth Before A Fall”
  • Chapter 12: The Winds of Change
  • Chapter 13: The Natural Rate of Employment
  • Chapter 14: Who Bears the Burden of Unemployment?
  • Chapter 15: Unemployment and the State
  • Chapter 16: Afterword

Detailed Summary

Highlights

  • The Employment Act of 1946 made the eradication of unemployment a federal government priority. Yet during the first thirty years of the twentieth century, when government assumed absolutely no responsibility for employment, the mean unemployment rate was less than 5 percent and stable. Throughout the most recent thirty years (1960-89), in contrast, the average has been one-fourth higher and is rising.

  • Government fiscal policy, intended to alleviate unemployment, actually increases it. “The period with the most expansionary fiscal policy, 1930-59, had the highest average rate of unemployment” in the U.S. during the twentieth century, “while the period with the least expansionary fiscal policy,” the previous thirty years, “had the lowest average rate of unemployment.”

  • The ostensibly highly successful expansionary policies of the 1960s caused long-run damage to the economy, bringing about the stagflation of the 1970s and early 1980s.

  • The massive unemployment of the Great Depression, rather than representing a failure of capitalism, resulted from too much government intervention. Herbert Hoover’s “jawboning” efforts to raise real wages generated unemployment 28 percent higher than it would have been if real wages had remained constant.

  • President Franklin D. Roosevelt’s subsequent New Deal prolonged rather than alleviated the Great Depression. Without the negative impact of new federal labor laws, social security, and unemployment compensation alone, the unemployment rate would have been 6.7 instead of 17.2 percent.

  • After World War II, the government released 12 million Americans into the job market while simultaneously slashing government spending. Yet in a dramatic refutation of Keynesian economic theory, the market absorbed the workers and unemployment never rose over four percent.

  • Statistical research demonstrates that during the 1970s unemployment insurance payments raised the aggregate unemployment rate by the better part of one full percentage point.

  • Welfare and other forms of public aid also have significant negative impacts on employment. In fact, every one percentage point increase in the proportion of GNP devoted to public assistance creates about one percentage point increase in the unemployment rate.

  • There are substantial differences in unemployment levels between states, with some parts of the country suffering three or four times the rate of others. The lowest unemployment areas are locations with relatively high agricultural employment, modest levels of unionization, and low rates of public assistance.

  • In 1930, unemployment among non-whites was lower than among whites by about one percentage point. Today, of course, the opposite is true, with non-white unemployment approximately double that of white unemployment. Although many factors are at work, the empirical evidence seems consistent with the view that public intervention in labor markets is a major cause of the change.

Synopsis

The unemployed will always be with us. Or so we seem to be reminded by the current recession, as the unemployment rate surpasses 7 percent, its highest level in more than five years. But why should this be the case? After all, government at least since the New Deal has assumed responsibility for combating unemployment. Yet the American economy appears no more free of the sharp unemployment peaks that accompany recessions and depressions than before the 1930s. Could it be that government, rather than the solution, is actually the problem?

This is the sober conclusion of The Independent Institute’s new book, Out of Work: Unemployment and Government in 20th Century America. The authors are Richard Vedder and Lowell Gallaway, both Professors of Economics at Ohio University who have served on the Joint Economic Committee of Congress. With a foreword by Martin Bronfenbrenner (late Professor of Economics, Duke University), this volume amasses relentless and devastating empirical evidence that the major cause of high unemployment during the twentieth century in the United States, both cyclical and secular, is government itself.

Unemployment: Creating a Surplus of Labor

Ever since the work of John Maynard Keynes, economists have sought the causes of unemployment outside the labor market. They have blamed consumer demand, investment spending, interest rates, the money stock, exchange rates, and assorted other variables in unrelated markets.

Prior to the Great Depression, in contrast, economists usually attributed high unemployment to faulty prices within the labor market. Market prices should tend toward an equilibrium that equates the quantity demanded with the quantity supplied. If prices are held above equilibrium, quantity supplied will exceed quantity demanded. You will observe a surplus, which in the labor market is called unemployment. The pre-Keynesian neoclassical economists, as well as economists of the Austrian school, therefore blamed excessive unemployment on wage rates that, for whatever reason, were too high.

Out of Work tests this theory with astonishing results. “The model explains an impressive 90 percent of the variation in unemployment” over the last ninety years and accurately predicts every major recession and depression. Admittedly some of the data are highly imprecise and uncertain. So Vedder and Gallaway scrupulously test their hypothesis against alternative series, and it remains amazingly robust. These results are all the more remarkable when they are compared with the utterly dismal predictive power of the Phillips Curve, the now discredited mathematical model that dominated economic analysis of the labor market for so many years.

In short, unemployment can be fully accounted for by deviations of wages from their market-clearing level, and persistent deviations result from ill-conceived government policies. The neoclassical and Austrian economists were right. Markets work, even labor markets, if only government allows them to.

The Cyclical History of Unemployment

Do not conclude, however, that Out of Work is another dry, arcane, and ultimately sterile work of mathematical economics. Although the model of the labor market is the book’s cornerstone, it merely informs a full-blown narrative history of unemployment in the United States during the twentieth century. Here is where Vedder and Gallaway really show their scholarly acumen. Their attention to historical evidence and familiarity with the historical literature transcend the disciplinary boundaries of economics and measure up to the demanding standards of the most competent historian.

As Out of Work lucidly and absorbingly recounts unemployment’s history, it confirms over and over again that the main source of labor mispricing has been government intervention. Consider the Great Depression. Unlike any economic downturn before or since, this one saw unusually large numbers of Americans out of work for nearly a decade. What Vedder and Gallaway demonstrate with rich detail and powerful analyses is that both presidents Franklin D. Roosevelt and Herbert Hoover before him actually prolonged and exacerbated unemployment because their interventionist policies kept wages artificially high. The Great Depression exhibited unemployment of unique severity and duration because of uniquely devastating government intervention.

Out of Work’s comprehensive historical account throws light on issues other than unemployment as well. For instance, Vedder and Gallaway give us a new explanation for the Great Depression’ s banking crises. Monetarists, who blame the depression upon the collapse of the money stock that resulted from bank runs, have often attributed the runs to capricious and panicky depositor behavior, thereby justifying government deposit insurance. Keynesian economists, on the other hand, have argued that the bank runs did not cause the depression but rather the other way around. They see the entire economic collapse as a failure of the free market.

Vedder and Gallaway agree partially with the Keynesians, admitting that the first wave of panics was indeed caused by bank insolvency. But the market is not accountable for that insolvency. Instead the culprit was Hoover’ s high wage policy, which undermined the profitability of many firms that had borrowed from the banks. In other words, government employment policy caused the banking crises as well as the high unemployment.

Another of the many fascinating insights from Out of Work relates to historical statistics. The government has unaccountably changed its estimates for real GNP and inflation during and after World War II. The new estimates record a lower rate of inflation during the war and thus a higher growth in output. For reconversion after the war, the government’ s new statistics turn this story around. They now indicate high inflation and thus a huge fall in output that was not there before. Gallaway and Vedder convincingly demonstrate that the new figures, despite their drastic changes, are not based on any new evidence whatsoever. They are merely a statistical artifact, resulting entirely from changing base years. The more reliable numbers remain the old ones.

The reconversion after World War II is an interesting story in and of itself. The stability of the postwar economy, more than any other event, solidified the reign of Keynesian economics. Most major economists and commentators had earlier predicted dire economic consequences from the end of the war. When none of these consequences materialized, it was proclaimed a great victory for Keynesian demand management.

Only Vedder and Gallaway have had the perspicacity to ask the obvious question: what demand management? United States government spending declined precipitously in 1946 after the war ended and did not really start back upward again until the Korean conflict launched the Cold War in 1950. Reconversion consequently stands as an early and dramatic, but unrecognized, refutation of Keynesian theory. The civilian labor market adjusted quite smoothly to the massive influx of former military personnel with little or no government assistance.

Secular Trends in Unemployment

Out of Work covers not only the short-term cyclical ups and downs in unemployment but also the long-term secular trends. And here the impact of government is almost as dismal. The only respect in which unemployment might not be worse today than during the heyday of laissez faire is in its variability. The standard statistics show less instability since the Great Depression than before. Yet even this conclusion may be just another statistical artifact stemming from the fact that the figures for earlier periods are less reliable.

We do know for certain that the average rate of unemployment has risen. Between 1900 to 1929 it averaged under 5 percent. In the last two decades it has approached 7 percent. These figures represent what economists have come to call the “natural rate” of unemployment. Zero unemployment is neither attainable nor desirable. To have an efficient labor market, the economy must have some amount of frictional turnover in the labor force, as people move from job to job. This gives rise to the natural rate.

So why has the natural rate of unemployment risen over time? Market explanations are theoretically possible. Demographic changes in the work force, for example, can bring about a longer average time between jobs. Vedder and Gallaway, however, test these various explanations and find them insufficient. They determine that the main factor driving up the natural rate of unemployment is, again, government. Such policies as minimum wage laws, special legal privileges for labor unions, civil rights legislation, unemployment compensation, welfare, and above market wages for government employees have all played their roles. Even the government’ s efforts to end depressions have backfired. For Out of Work shows that average unemployment is higher during periods of government fiscal stimulation.

“What final conclusion do we reach?” ask Vedder and Gallaway. “It is a simple one. Observed variations in the natural rate of unemployment through time and over space are quite consistent with the basic thesis that has emerged from our treatment of the phenomenon of the business cycle. Government actions, as expressed in a wide range of public policy, generally have contributed to the presence of higher levels of unemployment, rather than lower.”

Future Prospects

If Vedder and Gallaway are right, and the neoclassical explanation for unemployment is so compelling, why was it ever supplanted in the first place? This leads us to still another dimension of Out of Work. In addition to a history of unemployment, the book simultaneously offers a history of economic thinking about unemployment.

In part, the Keynesian advocacy of government activism triumphed because of its political benefits. It invited economists to participate in the formulation and execution of policy. Perhaps more important, however, Vedder and Gallaway show that the neoclassical view of unemployment, while correct, was never adequately developed and defended. The entire subject of unemployment occupied only an obscure footnote in the writings of most neoclassical economists. The fact that they had not devoted much time and energy to elucidating their theory made it much easier to ignore.

We thus owe a real debt of gratitude to Vedder and Gallaway. They have taken a neglected avenue in economic thought and forged a powerful approach. Out of Work is so engagingly written that someone untrained in economics will find it easy, indeed enjoyable, to read. But its masterly integration of economic theory, statistical models, unemployment history, and the history of economic thought make it impossible to ignore. Out of Work will become one of those pathbreaking books that redefines the way people think about one of the most critical issues of the twentieth century.

Praise

Out of Work is a fascinating book incorporating impressive and thorough analyses of American macro-economic and employment policies. The Independent Institute is to be congratulated on sponsoring an important book which will interest economists, policy-makers, and others concerned with employment and the economy.”
W. Allen Wallis, former Under Secretary of State for Economic Affairs

“The latest views on unemployment policies.”
Robert B. Reich, former Secretary of Labor

“It is good to see this important issue dealt with in such a comprehensive fashion.”
Lawrence B. Lindsey, Chief White House Economic Policy Advisor; former Member, Board of Governors, Federal Reserve System

Out of Work is more than a helpful handbook to understand the basic facts and problems of unemployment. It brings clear-sighted insights into the problem and it is a valuable contribution to the unemployment debate. The idea that government employment policies, especially those that are based on demand management, bring about even more unemployment, is, of course, not new, but to present it in such a convincing way, with profound theoretical background and empirical evidence, is a worthy achievement. Based on my experience with our country, unemployment is basically a phenomenon of labour market frictions and imperfections and can best be explained by microeconomic analysis of the labour market.”
Vaclav Klaus, former President and Prime Minister, Czech Republic; President, Chamber of Deputies, Parliament of the Czech Republic

Out of Work is a great and important book.”
Milton Friedman, Nobel Laureate in Economic Science

Out of Work addresses one of the fundamental problems of our times and does so in a refereshingly rigorous way, dispelling many of the myths that still surround the subject. This is even truer in Europe, where large and persistent unemployment is still seen by many as a symptom of ‘market failure.’ We definitely need a European version of this timely and important book.”
Antonio Martino, former Minister of Foreign Affairs, Republic of Italy

“Vedder and Gallaway show convincingly that we need once again to rethink our entire notion of unemployment. It took a revolution in economic thought once to convince economists that unemployment could be cyclical. Now it will take another revolution to understand how sixty years of the welfare state together with intrusive government regulations have given us unemployment problems largely unreachable by federal policies designed to cope with cyclical unemployment. In effect, you cannot turn a standard screw with a Phillips (Curve) screwdriver.”
Jonathan R. T. Hughes, Professor of Economics, Northwestern University

Out of Work is a very important book about a very important economic problem of our times which, unfortunately, has not received much attention. I hope it will be widely read and will have a strong influence on economic policy.”
Gottfried Haberler, Senior Fellow, American Enterprise Institute

Out of Work is an ambitious attempt by two well-known economic historians to bring historical and contemporary evidence to bear on the relationship between various government policies and unemployment. I say ambitious, because Vedder and Gallaway seek a single, unified explanation of all episodes of cyclical unemployment in twentieth-century America, as well as an explanation of certain cross-sectional patterns. Their theoretical framework, which they label 'neoclassical Austrian,' is simple enough to be summed up in one sentence: Unemployment occurs whenever real wages are excessive compared with labor productivity. . . . Economists who are unfamiliar with the basic facts of twentieth-century business cycles will find Out of Work a convenient, if idiosyncratic, reference. Vedder and Gallaway's analysis of the post-World War II recovery, which downplays the role of 'pent-up' demand, is provocative and worthy of debate.”
Industrial and Labor Relations Review

Out of Work is a book of great interest that should be taken seriously.”
Kenneth E. Boulding, late Distinguished Professor of Economics, University of Colorado

Out of Work is the most comprehensive book ever to appear on unemployment in the United States.”
George Gilder, Senior Fellow, Discovery Institute

Out of Work is a serious work useful to keep at hand.”
Charles P. Kindleberger, Professor Emeritus of Economics, M.I.T.

Out of Work is a triple hit: an engaging narrative of a century of U.S. economic history that focuses on real wage rates adjusted for productivity changes to explain unemployment patterns; an attack on the mythology that high wage rates and government spending reduce unemployment; a critique of wrongheaded public policies since 1930 that have raised unemployment levels.”
Anna J. Schwartz, Research Associate, National Bureau of Economic Research

Out of Work is a timely and provocative study that deserves consideration in any discussion of economic policy issues.”
Choice

“Vedder and Gallaway's book addresses basic economic propositions concerning the determinants of employment and unemployment in the context of actual American experience. Particularly challenging and useful is their effort to identify the effects of government policies on how fully and effectively the labor force has been employed. Public policy-makers would do well to read Out of Work.”
Norman B. Ture, late former Under Secretary of Treasury

Out of Work is sure to raise the hackles of those who think what this country needs is a sweeping national industrial policy. Vedder and Gallaway make a convincing case that government 'good intentions' often end up costing jobs, leaving the intended beneficiaries worse off than before government intervention. This book should be required reading for the Clinton Administration’s economic and labor advisers.”
Linda Chavez, former Executive Director, U. S. Commission on Civil Rights

Out of Work is essential reading for labor economists, labor historians, other social scientists, and especially policy makers who are interested in and concerned about U.S. unemployment. Vedder and Gallaway carefully blend historical insights and economic theory to develop a highly readable, comprehensive, and compelling explanation of U.S. unemployment in the twentieth century. They persuasively and exhaustively demonstrate that well-intentioned public policies are the cause of rather than the cure for joblessness and, in so doing, effectively discredit the conventional wisdom that government actions can alleviate unemployment. Thus, Out of Work makes major contributions to current public policy debates about such issues as job creation, training programs, and mandated benefits. Scholars will find a wealth of research material in this volume which will significantly influence thinking about labor markets in the future.”
James T. Bennett, Professor of Economics, George Mason University

Out of Work is an interesting book, and we needed to have it coming along. The authors are fundamentally on target. We have built so many government impediments into the labor market that the stubbornly high average rates of unemployment are very difficult to work down.”
PAUL W. McCRACKEN, former Chairman, President’s Council of Economic Advisors; Edmund Ezra Day Distinguished University Professor of Economics and Public Policy, University of Michigan

“In the fantastically detailed book, Out of Work, Vedder and Gallaway know every bit of evidence about unemployment going well back into the nineteenth century. Their conclusion is that government action aimed at eliminating unemployment defeats itself. The best thing to do in dealing with unemployment is to leave it alone.”
William A. Niskanen, former Chairman, President’s Council of Economic Advisors; Chairman, Cato Institute

“Its combination of history and economic theory make the analysis and results in Out of Work very powerful., bringing new light on one of this century’s most pressing problem: unemployment.”
Walter J. Wessels, Professor of Economics, North Carolina State University

Out of Work is fascinating and brilliant. It is a comprehensive and important book on perhaps the central economic and social issue of the twentieth century. Not only do Vedder and Gallaway show that government policies have frequently made the situation worse, they also deal a deathblow to the economic nonsense that has passed to justify such policies.”
Lawrence A. Kudlow, Senior Editor, National Review

“Why are so many people in advanced industrialized nations persistently out of work? It is commonly believed that unemployment is a derivative of marketplace failure, and that in such cases the public sector is needed to prop up unemployment. Vedder and Gallaway turn this conventional wisdom on its head and convincingly demonstrate that unemployment is almost solely a consequence of government and its muddle-headed, if well-intentioned, interventions.”
Stephen Moore, Chief Economist, Heritage Foundation; former Senior Economist, Joint Economic Committee, U.S. Congress

“The authors provide a fascinating account of the government policies responsible for unemployment. The evidence produced in Out of Work leaves me convinced that the labour market explanation of unemployment will eventually dominate over that found in today’s leading textbooks of macro-economics.”
Herbert G. Grubel, Professor of Economics, Simon Fraser University

“With the presentation of detailed data about unemployment in the nine decades of this century, the authors of Out of Work demonstrate that the ‘wages theory of unemployment’ is the basic explanatory variable. This book warrants careful reading.”
Political Science Quarterly

“A fascinating account, Out of Work is an important book that provides convincing evidence that our chronic unemployment is not due to high interest rates, free trade or the internationalization of the economy, as current political rhetoric would have us believe. It has been entrenched by deliberate government policy—well-intentioned policy, perhaps, but exceedingly ill-conceived.”
British Columbia Report

Out of Work is the most important book on macroeconomics since Friedman and Schwartz’s Monetary History of the U.S. Any honest writer of a macroeconomics text will have, henceforth, to present the Vedder-Gallaway model and the evidence on which it is sustained as a serious alternative to the Keynesian orthodoxy and an important complement to monetarism. No contemporary discussion of macroeconomics can now be complete without reference to Out of Work. I believe that the book is even a more valuable contribution to the debunking of Keynesianism than Leijonhufvud's On Keynesian Economics and the Economics of Keynes.”
Charles W. Bairs, Emeritus Professor of Economics, California State University, East Bay

“In Out of Work, Richard Vedder and Lowell Gallaway have written a refreshing and important book about unemployment in the United States by focusing on the proximate conditions in the labor market. . . . The authors are correctly sharp about much of the academic theory and government policy affecting the labor market in this century.”
Business Economics

Out of Work explores the historical record of unemployment in the United States and critiques public policy developments that have shaped the U.S. labor market and have had an impact on unemployment. The book develops the thesis that the state has increased the magnitude of unemployment in the U.S., that macroeconomic manipulations have ultimately proved unsuccessful, and that the invisible hand of market forces has done a reasonably good job of providing jobs and incomes for Americans. . . . Out of Work must be admired for its scope and breadth of coverage and, above all, for the tenaciousness with which the authors pursue their argument. Many of their arguments are highly controversial and will undoubtedly stimulate wide discussion and debate. To sum up, this is a book which you might like, you might hate, but you certainly cannot ignore.”
Journal of Economic Literature

Out of Work is an impressive piece of scholarship, maybe even a great book. It traces and analyzes unemployment in the United States during this century, arguably the number one economic issue of our time. Based on a daunting amount of work, the authors conclude that market adjustments have worked reasonably well to correct imbalances in the markets for labor services, while government interventions have not. . . . The authors’ single equation model works remarkably well in catching every up and down in unemployment, including the Great Depression and World War II. The statistical model is fleshed out by careful historical analysis of each business cycle episode. The book also is filled with startling facts and deals carefully with the intellectual history behind the interventions that impeded downward adjustments of productivity-adjusted wages and hence thwarted business recoveries. . . . We are blessed to have this book today. A bonus feature is that the book is user-friendly enough so that it can be employed—very productively it seems to me—in upper division courses in labor, macroeconomics, U.S. economic history, and contemporary economic issues.”
Journal of Labor Research

“In the important book, Out of Work, by Richard Vedder and Lowell Gallaway, the authors show that unemployment is caused by government taxes on employment, government regulation of labor markets, and macroeconomic ‘full employment’ policies. Both noted labor economists, Vedder and Gallaway show that government always blames unemployment on factors outside the labor market—such as consumer demand, interest rates, and currency exchange rates—rather than on its own policies that make labor more expensive. Regulations and taxes drive the cost of labor above the market wage, thus leaving many without jobs. It is well known, for example, that Roosevelt’s New Deal policies failed to alleviate unemployment during the 1930s. But this doesn’t mean the policies had no effect. Vedder and Gallaway amass relentless evidence to show that the New Deal did terrible harm by almost tripling the unemployment rate. But among the most striking conclusions of Out of Work is that in 1930 whites has a higher unemployment rate than minorities. Vedder and Gallaway attribute the astonishing reversal in employment situations to the impact of welfare and public assistance on labor markets. The compassionate policies designed to do good have done harm instead.”
Paul Craig Roberts, former Assistant Secretary of the Treasury for Economic Affairs

“Vedder and Gallaway's Out of Work is a blockbuster book on the economics of the vexed problem of unemployment. The authors examine and develop a sound economic theory of unemployment, and then apply it in a notable way to the history of twentieth-century America. A blend of excellent economic theory and incisive statistical analysis, Out of Work is a superbly written book that demonstrates conclusively that government, far from being the solution to the unemployment problem, has actually created that problem by a spectrum of policies that push wage rates higher than the market level. Coming from an independent perspective, Vedder and Gallaway confirm the Austrian theory of cycles and unemployment. The authors essentially conclude that the best thing the government can do for both the micro- and the macro-economy is to fade out of the picture. In short, markets work, if the government will only leave them alone. Vedder and Gallaway are to be congratulated for a rare feat: producing a work that is eminently scholarly and yet fascinating to read.”
Murray N. Rothbard, late S. J. Hall Distinguished Professor of Economics, University of Nevada, Las Vegas

“Much of the evidence adduced by Out of Work is presented in the style so masterfully developed in Friedman and Schwartz: Logic and narrative are used to blend seemingly unrelated facts into a coherent view of the world. In the present instance, that view is that during the twentieth century, the principal cause of high cyclical and secular unemployment in the United States is the set of policies chosen by the federal government. . . . The singularly valuable contribution of Vedder and Gallaway lies in their elegant rendition of a comprehensive view of the American experience across the span of nearly a century.”
Public Choice

“Economists have bickered about labor markets, unemployment, and government action for a long time. Richard Vedder and Lowell Gallaway, two distinguished economists at Ohio University, have put many of these issues to rest in a new volume, Out of Work: Unemployment and Government in Twentieth-Century America. . . . The authors make an eloquent case that labor markets can and should be permitted to function without government intrusion. Government simply makes a mess of things and creates deeper unemployment. If permitted to do so, the wage rate will clear the labor market and there will be no unemployment. . . . Given the analytical truths established by the authors, the future does not look bright. . . . Perhaps the only hope is for policy-makers to read Out of Work and see if they can implement the author's prescription for avoiding disaster.”
Richard L. Rowan, Co-Director, Center for Human Resources, Wharton School, University of Pennsylvania

Out of Work, by Professors Richard Vedder and Lowell Gallaway could go a long way toward fostering clearer thinking about the ‘problem’ of unemployment. . . . Unemployment not only reflects excessively high wages, but also is exacerbated by government programs and regulations designed to increase earnings and foster 'income security.' . . . We can only hope that Out of Work is only the beginning of a renewed emphasis on the compensation of employees as a cost of production rather than as a source of demand.”
Research Reports, American Institute for Economic Research

“I have such profound respect for Out of Work. Real wages matter, and everything else is only important as it trickles down to real wages. Congratulations!”
Louis W. Barnett, former Vice Chairman, Unemployment Insurance Appeals Board, State of California

“The authors of Out of Work estimate a regression equation with the U.S. unemployment rate as the dependent variable and nominal wages, consumer price changes and labour productivity as the independent variables, using annual data for the period 1900 through 1990. The equation in even its simplest form without lags explains 89.9 per cent of the variance in unemployment. . . . The authors use some Austrian concepts to discuss the development of unemployment disequilibria and the tendency. . . . There exists a unique opportunity for Canadian economists to examine our country's historic experience with unemployment in the light of the Vedder-Gallaway model. However, even without a detailed study of the past, the model appears to be relevant to the explanation of some puzzles surrounding current conditions. . . . The evidence produced in the Vedder-Gallaway book leaves me convinced that the labour market explanation of unemployment will eventually dominate over that found in today's leading textbooks of macro-economics. However, it will be a long time before this change is accomplished, largely because few economists are willing to adopt new ideas that make obsolete their own investment in skills. Until then, textbook writers who want to have a market will continue to cater to the Keynesian orthodoxy. This is unfortunate because the chattering classes and politicians taught to believe in the Keynesian paradigm will continue to shape and make wrong economic policies. Unemployment and sluggish growth will persist needlessly.”
Canadian Public Policy

About the Author

Richard K. Vedder is Senior Fellow at The Independent Institute and both he and Lowell E. Gallaway are Distinguished Professors of Economics at Ohio University.

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News Date
“Harm of minimum-wage laws is neglected and poorly understood” Out of Work: Unemployment and Government in 20th Century America by Richard Vedder and Lowell Gallaway cited in The Augusta Chronicle Mon., Jun. 23, 2014

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