How the National Industrial Recovery Act made the Great Depression worse

By Scott Sumner.

"In July 1933, FDR implemented the National Industrial Recovery Act by ordering firms to cut weekly hours from 48 to 40, while keeping nominal wages unchanged.  This effectively boosted nominal hourly wages by roughly 20%, almost overnight. The stock market crashed on the announcement.

Between March and July of 1933, industrial production had soared by 57% under the influence of FDR’s dollar devaluation program.  After July 1933, industrial production started declining due to the high wage costs imposed by the NIRA.  When the program was repealed in May 1935, industrial production was actually lower than in July 1933.  Immediately after the NIRA was repealed, industrial production began rising extremely rapidly.  You don’t get more clearcut policy experiments.

But many California legislators seem unaware of the NIRA’s history.  Alex Tabarrok directed me to this WSJ article:

A bill moving through the Legislature would shorten California’s normal workweek to 32 hours from 40 for companies with more than 500 employees. Workers who put in more than 32 hours in a week would have to be paid time-and-a-half. And get this: Employers would be prohibited from reducing workers’ current pay rate, so they would be paid the same for working 20% less.

That’s very similar to the failed NIRA policy of 1933."