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Out of Work: Unemployment and Government in Twentieth Century America.

MANY INTELLECTUALS must have a defective gene. All too often, they overlook a simple explanation based on proximate conditions in favor of a contrived explanation based on some remote condition. (I was reminded about this last year, when the trendy explanation of the Los Angeles riot was to blame it on the Simi Valley jury.) The reason for this behavior is simple: intellectuals have a comparative advantage in contrived explanations. There is also value in developing alternative contrived explanations when simple explanations are misleading or not sufficient. In general, however, most contrived explanations are wrong and, other things equal, simple explanations are preferred.

Nowhere is this pattern more apparent than in the several major competing explanations of unemployment. Marxists blame unemployment on the private ownership of capital. Syndicalists blame labor-saving technology and foreign competition. Preachers and politicians blame greedy employers. Keynesians blame the puritans because they save too much. Monetarists blame the central bank. Supply-siders blame higher taxes. And each of these explanations is held with a conviction that seems immune to argument and evidence.

Richard Vedder and Lowell Galloway have written a refreshing and important book about unemployment in the United States by focusing on the proximate conditions in the labor market. They offer two simple hypotheses: (1) Most of the variation in unemployment is caused by changes in the real labor costs per unit of output, which the authors term the adjusted real wage; and (2) most of the variation in the adjusted real wage is caused by changes in government policy. The authors first summarize the record of unemployment in the United States from 1900 through 1989. The most interesting patterns in this record are the following:

1. The average unemployment rate from 1900 through 1930 was lower than in the period since World War II.

2. The variation in the unemployment rate before 1930. however, was higher than in the period since World War II.

3. Unemployment rates did not differ significantly by race or sex prior to World War II. Since that time, the relative unemployment rate has increased sharply for nonwhites and somewhat for women.

Any serious theory of unemployment should explain these major patterns.

The authors then summarize the several dominant theories of unemployment and their own version of a "neoclassical/Austrian" theory. At this point, the analysis is somewhat sloppy. The test equation for all of their statistical analysis, for example, is not derived from the demand and supply framework described in the text and is not modified to reflect that real unit labor costs are not exogenous in the current period. For this reason, their statistical analysis does not provide a basis for estimating the relative effects of demand and supply conditions.

For this reviewer the most rewarding section of this book is a nine-chapter narrative of the unemployment record, academic theories, and government policies since 1900. The authors are careful in their use of data, especially during periods of great change such as the 1930s and 1940s. This narrative is engaging and well written. And, for me, the authors are correctly sharp about much of the academic theory and government policy affecting the labor market in this century.

For both good and bad reasons, this important book is likely to be rejected by most academic economists. The author's theory and statistical tests are almost defiantly low tech. I would call it sloppy. That is unfortunate. A comparably simple test equation derived from a neoclassical model would have protected the authors from legitimate technical criticism and produces much the same results. The wrong reason that this book will be rejected is that many economists have an investment in both complex theories and government policies that the authors effectively skewer.

This book was sponsored and published by the Independent Institute, a small young policy institute in Oakland that is producing good scholarly work on important issues. As the chairman of a friendly competitor, my congratulations and best wishes.

William Niskanen The Cato Institute
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Author:Niskanen, William
Publication:Business Economics
Article Type:Book Review
Date:Jan 1, 1994
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