Review of Austrian Economics - The Ludwig von Mises Institute

22 The Review of Austrian Economics, Vol. 5, No. 2
w
Unempolyment
Figure 1. Wage Rates and Unemployment
demand curve; the shift in the demand curve could result from a
combination of productivity advance and price increase;
(4) a reduction in labor supply to S2.
All four of the responses mentioned above impact on equilibrium
wage levels, so it is not too much of an exaggeration to state that
regarding unemployment, traditional labor market analysis suggests
that "wages alone matter." This is in marked contrast to the Keynesian
perspective that dominated economic thinking from the 1940s
through the 1960s that, with little exaggeration, said that "wages do
not matter." A small band of economists, including Ludwig von Mises,
F. A. Hayek, Benjamin Anderson and W. H. Hutt, never abandoned
the notion that wages are critical in unemployment determination,
but these voices carried no weight in the development of the consensus
interpetation of why America avoided a depression after World
War II. 46
Yet the empirical evidence, which suggests that "pent up" demand
played no meaningful role for nearly two years in which unemployment
stabilized at low levels, is consistent with the theory espoused
above. This is not to deny that consumers hungered for consumer
goods. Nonetheless, in the critical reconversion period, the growth in
actual consumption was modest compared with the reduction in
federal defense-related spending.
46 For more on the role of wages in unemployment from the perspective of economic
theory, the history of economic thought, and empirical evidence relating to the American
experience, see Lowell Gallaway and Richard Vedder, "Wages, Prices and Employment:
Von Mises and the Progressives," Review of Austrian Economics 1 (1987): 33-80.