Impact of New Deal Policies on Wages, Prices, and Employment: A Dynamic Analysis, Papers of Business and Labour Law

Download Impact of New Deal Policies on Wages, Prices, and Employment: A Dynamic Analysis and more Papers Business and Labour Law in PDF only on Docsity! Research Memo Deparment of Economics University of California, Los Angeles New Deal Policies and the Persistence of the Great Depression: A General Equilibrium Analysis∗ Harold L. Cole and Lee E. Ohanian February 2003 ∗Ohanian: UCLA and the Federal Reserve Bank of Minneapolis. We would like to thank V.V. Chari, Tom Holmes, Narayana Kocherlakota, Bob Lucas, Ed Prescott, Tom Sargent, Alan Stockman, Nancy Stokey, and in particular, Fernando Alvarez for their comments. The views expressed herein are those of the authors and not necessarily those of the Federal Reserve Bank of Minneapolis or the Federal Reserve System. 1. Introduction The recovery from the Great Depression was weak. Figure 1 shows real output, real consumption, and hours worked. Real GDP per adult which was 39 percent below trend at the trough of the Depression in 1933, remained 27 percent below trend in 1939. Similarly, private hours worked were 27 percent below trend in 1933, and remained 21 percent below trend in 1939. The weak recovery is puzzling, because the large negative shocks that some economists believe caused the 1929-33 downturn - including monetary shocks, productivity shocks, and banking shocks - become positive after 1933. These positive shocks should have fostered a rapid recovery with output and employment returning to trend by the late 1930s.1 Some economists suspect that President Franklin Roosevelt’s “New Deal” cartelization policies, which limited competition in product markets and increased labor bargaining power, kept the economy depressed after 1933.2 These policies included the National Industrial Recovery Act (NIRA), which suspended antitrust law and permitted collusion in some sectors provided that industry raised wages above market clearing levels and accepted collective bargaining with independent labor unions. Despite broad interest in the macroeconomic impact of these policies, there are no theoretical general equilibrium models tailored to study this question. This paper develops a theoretical model of these policies, and uses it to quantitatively evaluate their macroeconomic effects. We construct a dynamic model of the intraindustry bargaining process between labor and firms that occurred under these policies, and embed this bargaining model into a multisector dynamic general equilibrium model. The model differs from existing insider-outsider models in a number of ways. One key difference is that our model allows the insiders to choose the size of the worker cartel, which lets us study the impact of the policies in a much richer way. We simulate the model during the New Deal and compare output, employment, consumption, investment, wages, and prices from the model to the data. 1The monetary base increases more than 100 percent between 1933 and 1939, the introduction of deposit insurance ends banking panics by 1934, and total factor productivity returns to trend by 1936. Lucas and Rapping (1972) argue that positive monetary shocks should have produced a strong recovery with employment returning to its normal level by 1936. Cole and Ohanian (1999) make similar arguement about positive productivity and banking shocks. 2See Friedman and Schwartz (1963), Alchian (1970), and Lucas and Rapping (1972). 1 of Justice (DOJ) after 1935, and shows that the government openly ignored collusive arrange- ments in industries that paid high wages. We also present data that systematically shows wages and prices continued to rise after the Court struck down the NIRA. A. The NIRA Roosevelt believed that the severity of the Depression was due to excessive business competition that reduced prices and wages, which in turn lowered demand and employment. He argued that government planning was necessary for recovery: ”...A mere builder of more industrial plants, a creator of more railroad systems, an or- ganizer of more corporations, is as likely to be a danger as a help. Our task is not...necessarily producing more goods. It is the soberer, less dramatic business of administering resources and plants already in hand.” (Kennedy, p. 373) A number of Roosevelt’s economic advisors, who had worked as economic planners during World War I, argued that wartime economic planning would bring recovery. Hugh Johnson, one of Roosevelt’s main economic advisors, argued that the economy expanded dur- ing World War I because the government ignored the antitrust laws. According to Johnson, this policy reduced industrial competition and conflict, facilitated cooperation between firms, and raised wages and output. (See Johnson (1935)). This wartime policy was the model for the NIRA. The cornerstone of the NIRA was a “Code of Fair Competition” for each industry. These codes were the operating rules for all firms in an industry. Firms and workers negotiated these codes under the guidance of the National Recovery Administration (NRA). The codes required Presidential approval, which was given only if the industry raised wages and accepted collective bargaining with an independent union.5 In return, the Act suspended antitrust law and each industry was encouraged to adopt trade practices that limited competition and raised prices. By 1934, NRA codes covered over 500 industries, which accounted for nearly 80 percent of private, non-agricultural employment.6 5In some cases, some of the labor provisions were adopted before the codes were written. This was achieved by Roosevelt’s Re-employment Agreement (PRA) (see Dearing, Homan, Lorwin, and Lyon, “The ABC of the NRA”, Brookings, 1934). Industries that followed the agreement paid minimum wages and consequently were permitted to sell to government agencies. 6The private, non-agricultural sectors exempted from the NIRA were steam railroads, non-profit organi- 4 All codes adopted a minimum wage for low-skilled workers, and almost all codes spec- ified higher wages for higher-skilled workers.7 A key element was equal treatment - employees performing the same job were paid the same wage. Consequently, codes generally did not permit differential wages based on seniority or other criteria. (See for example the Petroleum Code, Codes of Fair Competition, volume 1, page 151). We later show that this equal treat- ment provision will be critical for understanding the depressing effects of New Deal policies. Most industry codes included trade practice arrangements that limited competition, including minimum prices, restrictions on production, investment in plant and equipment, and the workweek, resale price maintenance, basing point pricing, and open-price systems.8 Minimum price was the most widely adopted provision, and the code authority often deter- mined minimum price in many industries. Several codes permitted the code authority to set industry-wide or regional minimum prices. In some codes, the authority determined the minimum price directly, either as the authority’s assessment of a “fair market price”, or the authority’s assessment of the “minimum cost of production”. In other codes, such as the iron and steel codes and the pulp and paper codes, the authority indirectly set the minimum price by rejecting any price that was so low it would “promote unfair competition.” The trade practice arrangements had explicit provisions for profits. For example, some minimum price calculations included explicit payments to capital, such as depreciation rent, royalties, director’s fees, research and development expenses, amortization, patents, maintenance and repairs, and bad debts and profit margins as a percent of cost.9 B. Cartelization Continues after the NIRA On May 27, 1935 the Supreme Court ruled that the NIRA was an unconstitutional delegation of legislative power, primarily due to the NIRA’s suspension of the antitrust laws. Roosevelt opposed the Court’s decision: “The fundamental purposes and principles of the zations, domestic services, and professional services. 7See Lyon et al 8Open price systems required that any firm planning to reduce its price must pre-announce the action to the code authority, who in turn would notify all other firms. Following this notification, the announcing firm was required to wait a specific period before changing its price. The purpose of this waiting period was for the code authority and other industry members to persuade the announcing firm to cancel its price cut. 9For example, the stone industry included a 10 percent profit margin; the concrete floor industry called for a profit margin that was a “reasonable percentage” over cost. (See Lyon et al, pp. 589-599). 5 NIRA are sound. To abandon them is unthinkable. It would spell the return to industrial and labor chaos.” (Hawley, page 124.) This section shows that the government continued anti-competitive policies through new labor legislation and by ignoring the antitrust laws. The primary post-NIRA labor policy was the National Labor Relations (NLRA) Act, which was passed on July 27, 1935. The NLRA gave even more bargaining power to work- ers than the NIRA. The NLRA gave workers the right to organize and bargain collectively through representation that had been elected by the majority of the workers. It prohibited management from declining to engage in collective bargaining, discriminating among employ- ees based upon their union affiliation, or forcing their employees to join a company union. The Act also established the National Labor Relations Board (NLRB) to enforce the rules of the NLRA and enforce wage agreements. The NLRB had the authority to directly issue cease-and-desist orders. The NLRA allowed labor to form independent unions with significant bargaining power (see Taft 1964, Mills and Brown 1950 or Kennedy (1999) p. 290-91). Union membership and strike activity rose considerably under the NLRA, particularly after The Supreme Court upheld its constitutionality in 1937. Union membership rose from about 13 percent of em- ployment in 1935 to about 29 percent of employment in 1939, and strike activity doubled from 14 million strike days in 1936 to about 28 million in 1937. Strikes during the New Deal were very effective because the NLRA allowed workers to take unprecedented actions against firms. One such action was the “sit-down strike”, in which strikers forcibly occupied factories and halted production. The sit-down strike was used with considerable success against auto and steel producers.10 The NLRA contrasts sharply with pre-New Deal government strike policy, in which government injunctions and/or police action were frequently used to break strikes. The “equal pay” feature of NIRA labor policies continued in post-NIRA union con- tracts. Taft and Reynolds (1964) and Ross (1948) document how unions established uniform and standardized wage schedules that narrowed wage differentials: “to the extent that union- ism has had any net effect on occupational differentials, this has almost certainly been in the direction of narrowing them” (Taft and Reynolds p. 185). This indicates that the NIRAs 10See Kennedy (1999), pp. 310-317. 6 wages for some energy industries and for agriculture. We divide nominal wages by the GNP deflator to see if there were differences in real wage changes across the two categories. Regarding prices, We have price indexes for the major NIPA categories, wholesale price indexes for manufacturing industries, and for some energy industries. We divide the nominal price indexes by the price index for consumer services. We choose the price of consumer services as the numeraire because it is the aggregate price index likely to be least affected by the policies, as some consumer services were not covered by the policies and because collusion failed in some services that were covered.12. This procedure of forming relative prices lets us determine whether cartelized prices rose relative to non-cartelized prices (services). To the extent possible, we report prices and wages for the same industries/sectors. We describe how we divide these sectors between the cartelized and non-cartelized groups below. Table 2 shows annual data for wages in 3 sectors covered by the policies - manufac- turing, bituminous coal, and petroleum products, and 2 sectors not covered - anthracite coal and all farm products. The farm sector was not covered by the NIRA, by the NLRA, or by other policies that would have raised farm wages. Anthracite coal is a particularly interesting de facto uncovered sector, because it was supposed to have been covered by the NIRA, but the industry and the coal miners failed to negotiate a code of fair competition. We find that real wages in the three covered sectors rise after the NIRA is adopted and remain high through the rest of the decade. Compared to their 1929 levels, manufacturing, bituminous coal, and petroleum wages are between 24 to 33 percent above trend in 1939. In contrast, the farm wage is 31 percent below trend, and anthracite coal is 6 percent below trend. Focusing on the two coal wages, we find that bituminous coal miners - who successfully negotiated under the NIRA - were able to raise their real wage substantially, while anthracite coal miners - who did not successfully negotiate under the NIRA - were not able to raise their real wage. Since the manufacturing wage is an aggregate of many manufacturing industry wages, it is natural to ask whether this increase is due to increases across all or most manufacturing industries, or whether it is due to very large increases in just a few industries. Using monthly 12For example, physican services were not covered by the policies. Other services, such as dry cleaning, were covered, but were found to be very competitive by the NIRA review board (1934). 9 industry-level wage data within manufacturing from the Conference Board, (Beney, 1936), we find that these industry wages systematically and significantly rose. We report real wages in 11 manufacturing industries for which we also have price data. Table 3 shows significant increases in all 11 industries occurring after the NIRA is passed. Here, we index the real wage to 100 in February 1933 (which is a few months prior to the NIRA) to focus on the effect of the adoption of the policies on real wages. All of these industry wages are significantly higher at the end of 1933, which is six months after the Act is passed. The smallest increase is seven percent (farm implements), and the largest increase is 46 percent (boots and shoes). These wages also remain high through the end of the NIRA (May 1935), and also after the NIRA. The average real wage increase across these 11 categories in June 1936 relative to February 1933 is 25.4 percent.13 We now turn to analyzing the relative price data. We continue to treat the manufac- turing sector and the energy industries described above as the cartelized sectors. We omit the farm sector from this price analysis. We do not include farm goods in the uncovered category for prices, as we had done for wages, because the government adopted other policies to raise farm prices. However, these price support policies differed significantly from the NIRA as they did not include provisions to raise wages. Regarding the manufacturing sector, we would like to match up a price index for the overall manufacturing sector with the overall manufacturing wage index reported in Table 2. Unfortunately, there is no such price index. We therefore report relative prices of industries within manufacturing that we can match up with the manufacturing industry wage data reported in Table 3, and we also report relative prices of investment goods, which are a major 13These wage premia are high relative to traditional estimates of union wage premia. There are two important reasons why union/non-union wage premia estimates are not the right statistics for evaluating New Deal wage increases. The first reason is that the NIRA raised wages of union and non-union workers. Very few workers were even in unions in 1933, and the NIRA took this into account by forcing firms to raise wages of all workers to get cartelization benefits. For example, Lewis (1963) analyzes bituminous coal wages in regions with different unionization rates, and finds that wages rose substantially for all states, irregardless of the fraction unionized, with the highest percentage increases occuring in non-union regions. He also reports a union wage-differential of 10-18 percent in rubber tire manufacturing in 1935. But this statistic does not take into account the fact that overall rubber manufacturing wages rose 35 percent increase between 1933 and 1935. A second reason is that most estimates of union wage premia are from post-World War II data. These data are not good estimates of the impact of these policies on union bargaining, because postwar union bargaining power was lower than worker baragining power during the New Deal. 10 manufactured good. Table 4 shows relative prices of new fixed investment goods and durable equipment goods. These relative prices rise about 8-10 percent between 1934 and 1933, and are about 11-12 percent above their 1929 levels in 1939. These increases are particularly noteworthy because they occur during an economic recovery. Typically, the relative price of investment goods fall during recoveries (see Greenwood et al, 2000). We now turn to the other price data. Table 5 shows the manufacturing and energy goods prices before and after New Deal policies. We use the same format as in Table 3 for manufacturing industry wages by choosing the same reporting dates and the same date for the normalization. The timing and magnitude of the price increases are very similar to the other wage and price changes we observe. Prices for almost all the categories covered by the policies rise substantially by the end of 1933, and remain high through the end of the 1930s. It is again interesting to compare the price of bituminous coal - an industry that negotiated a code of fair competition under the NIRA - to the price of anthracite coal - an industry that did not negotiate a code of fair competition. The relative price of bituminous coal rises after the NIRA is passed, and remains high through 1939. In contrast, the relative price of anthracite coal is unchanged after the NIRA is passed, and then declines moderately over the rest of the 1930s. In summary, we have compiled wage data from manufacturing, energy, mining, and agriculture, and price data from these same sectors less agriculture. This evidence indicates that New Deal policies raised relative prices and real wages in those industries covered by these policies: manufacturing and some energy industries. Relative prices and real wages in these sectors increased significantly after these policies were adopted and remained high throughout the 1930s, whereas prices and wages in uncovered sectors did not rise. There is additional evidence supporting our conclusions about the effects of these policies. One source of evidence is the National Recovery Review Board (NRRB), which evaluated whether the NIRA was creating monopoly. This board was created because of widespread complaints by consumers, businesses, and government purchasing agencies about price fixing and collusion, and the board was in place even before all the codes of fair com- petition had been negotiated (Hawley, 1966). The NRRB wrote three different reports over the course of the NIRA, analyzing industries covering about 50% of NIRA employment. 16 11 With these elements, our model is consistent with key objectives of labor unions during the 1930s, including raising wages and eliminating wage differentials across similar workers (see Ross (1948) and Taft and Reynolds (1964)). Our model also is reminiscent of the classic Harris-Todaro (1969) model in which unemployment serves as a lottery for high wage jobs. A. Environment Time is discrete and denoted by t = 0, 1, 2, ...∞. There is no uncertainty. There is a representative household whose members supply labor and capital services, and consume the final good. There are two distinct types of goods: Final goods can be consumed or invested. These final goods are produced using a variety of intermediate goods. These intermediate goods are produced using identical technologies with capital and labor. There is a unit mass of intermediate goods indexed by i ∈ [0, 1]. Each i denotes a specific industry. We partition the unit interval of industries into different sectors. There are S sectors, and the set of industries in sector s is given by [ϕ s−1, ϕs], where ϕs ∈ [0, 1], ϕs−1 < ϕs, ϕ0 = 0 and ϕS = 1. Our model includes both industry output and sectoral output because the policies operated at the industry level, and because we will specify a substitution elasticity across goods at the industry level that differs from that at the sectoral level. Some of these sectors will be cartelized, and some will be competitive. We denote the output of industry i by y(i). All industries in all sectors share identical constant returns to scale (CRS) Cobb-Douglas technologies for producing output from capital and labor. Labor is completely mobile across industries and sectors. Capital is sector specific. The level of the capital stock in sector s in period t is denoted by Kst. Output for a representative intermediate producer in industry i at date t who rents kt units of capital and nt units of labor is: yt(i) = (ztnt(i)) γkt(i) 1−γ where zt denotes the date t level of labor-augmenting technology. The sequence {zt} ∞ t=0 is known with certainty. Sectoral output in sector s, Yst is a CRS constant elasticity of substitution (CES) 14 aggregate of industry outputs in that sector with curvature parameter θ, Yst = (∫ ϕs ϕs−1 yt(i) θdi )1/θ .(1) The final good, Yt, is produced from sectoral outputs using a CES production technology, Yt = [ S∑ s=1 Y φst ]1/φ .(2) This specification permits the substitution elasticity between industry outputs in the same sector (1 − θ)−1 to differ from the substitution elasticity between the aggregated outputs across sectors (1− φ)−1. This distinction is important, because the policies operated among disaggregated industries where substitution elasticities are likely to be much higher than at aggregated sectoral levels. In the fraction χ of the intermediate goods sectors, workers and firms in an industry in that sector bargain over the wage and the number of workers to be hired, and that firms can collude over production given an agreement with their workers. These are the cartelized industries. The remaining intermediate goods industries and the final goods producers are perfectly competitive. Thus, χ is a policy parameter that governs the scope of the cartelization policy. Symmetry implies the cartelized sectors and the competitive sectors can be aggregated. This lets us work with a two sector model with a cartel sector of size χ and a competitive sector of size 1− χ. We will use “m” to refer to cartel sector and we use “f” to refer to the competitive sector. The output of the cartel sector is: Ymt ≡ [∫ χ 0 yθt (i)di ]1/θ . The output of the competitive sector is: Yft ≡ [∫ 1 χ yθt (i)di ]1/θ . Final output is the numeraire. We denote the output and its price in a representative cartelized industry by ymt and pmt, and similarly denote the output and price in a repre- sentative competitive industry by yft and pft. We also denote the wage rates and capital rental rates in representative industries in the two sectors as wmt and rmt and wft and rmt. 17 17Symmetry implies that wage rates in all cartelized industries are the same. 15 A household member either works in the competitive sector, (nft), works in the cartel sector (nmt) (if the household member already has a cartel job), searches for a job in the cartel sector (nut), or takes leisure. Since the cartel wage will be higher than the competitive wage, household members compete for these rents by searching for cartel jobs. Searching consists of waiting for a vacant cartel job, and search incurs the same utility cost as working full time. If a cartel job vacancy arises, the job is awarded randomly at the start of the period to an individual who searched the previous period. We denote the probability of obtaining a cartel job through search in period t as υt. 18 To build in job turnover arising from life-cycle events such as retirement or disability, we assume that cartel workers face an exogenous probability of losing their jobs at each date. The probability that a worker retains their cartel job is π.19 B. Household Problem The representative family’s problem is: max {nmt,nut,nft} ∞∑ t=0 βt [log(ct) + φ log(1− nt)] subject to ∞∑ t=0 Qt [ wftnft + wmtnmt − ct + ∑ S (rstKst − xst) ] +Π0 = 0,(3) kst+1 = xst + (1− δ)kst(4) nmt ≤ πnmt−1 + υt−1nut−1,(5) nt = nft + nmt + nut, where πnm,−1 denotes the initial number of insiders in the first period. The household’s income consists of flows of labor income from the competitive and noncompetitive sectors, rental income from supplying capital, and date-zero profits (Π0). Equation (5) is the law of motion for the number of household members with cartel jobs (nmt). This is equal to the 18Employment in competitive industries confers no rents, hence search activity in these sectors is zero. 19With π < 1, there is a unique balanced growth for the model. If π = 1, then the balanced growth path depends on initial conditions. 16 Note that with an accepted agreement, insiders control entry into their group and exit (net of attrition) from their group. Moreover, insiders add new members only if it increases the insiders’ payoffs, as insiders do not care about the welfare of new members. Once new members are added, however, they become insiders the following period. Since insiders are perfectly insured within the family and because they can always work at the competitive wage, they maximize the expected present value of the premium between the cartel wage and the competitive wage. Moreover, given perfect family insurance, it is optimal that insiders who are terminated or who suffer exogenous attrition receive no insurance payments.22 The value of being an insider is the expected present value of the cartel wage premia. We assume that the firms will accept any wage and employment offer (w̄t, n̄t) that promises the firms at least their reservation profits Pt. Given this reservation profit constraint, an individual insider’s value of being in the cartel with an initial stock of n insiders is given by the following Bellman equation: Vt(n) = max (w̄,n̄) {( min [ 1, n̄ n ]) [w̄t − wft + π(Qt+1/Qt)Vt+1(πn̄)] } (9) subject to Πt(w̄, n̄) ≥ Pt. The probability that an insider is terminated is given bymin [1, n̄/n] . Insiders discount future wage premia (w̄t − wft) using the market discount factor scaled by the probability of remaining in the cartel: π(Qt+1/Qt). The insider’s proposal of (w̄, n̄) must yield the reserva- tion profit level of Pt, which we characterize later. (The appendix shows the derivation of 9). Vt(n) is decreasing in n, and is strictly decreasing if n > n̄ and w̄t > wft. The opportunity cost to the insiders of adding cartel workers (i.e. when n̄t > nt) consists of two pieces: the cur- rent wage premium, w̄−wft, as all workers are paid the same wage, and π(Qt+1/Qt)V ′(πn̄), reflecting the opportunity cost of having more insiders tomorrow. We now describe some properties of the solution to the insiders’ problem. First, we 22We assume that families are large enough to insure members against employment risk, but small enough such that family members work only in a small fraction of the catelized industries. This assumption implies that the family does not internalize the aggregate consequences of their actions since the likelihood of a family member obtaining a cartel job is independent of the actions of the industries in which family members work. 19 denote the pair (w∗t , n ∗ t ) as the maximum possible wage and the associated level of employment that satisfies the minimum profit constraint. We then have w∗t = Π −1 t (Pt) and n ∗ t = Nt(w ∗ t ). Since Π′t < 0, limw→∞Πt(w) = 0, and Pt ≤ Πt(wft), w ∗ t is well defined, and the value of Vt(n) defined in (9) is bounded above by ∑ ∞ τ=t π τ−tQτ(w ∗ τ − wfτ)/Qt. We now provide a characterization of the solution to the insiders’ problem. P
 1. In problem (9), the optimal policy is such that (i) Πt(w̄, n̄) = Pt (ii) if n ≤ n∗t , then n̄ ≥ n. (iii) if n∗t < n ≤ Nt(wft) then n̄t = n. (iv) if n > Nt(wft), then n̄ ≤ n. Proof. See the Appendix. Proposition 1(i) implies that insiders always set their offer so that firms earn their reservation profits. Proposition 1 (ii-iv) are about changes in the number of cartel workers. This change depends on the initial stock of insiders, n. There are three regions. Region 1 is where the initial stock is less than the optimal size (n < n∗), region 2 is where the initial stock is above the optimal size, but below the employment level of pure monopoly at the competitive wage: n∗t < n ≤ Nt(wft), and region 3 is where the initial stock exceeds the employment level of pure monopoly at the competitive wage: n > Nt(wft). We will now see that the impact of the policy depends on the initial stock of the insiders. The number of cartel workers is weakly increasing in region 1. Insiders add new members only if it raises the present value of the insiders’ surplus. Since they are below their optimal size (n < n∗), the insiders raise their current payoff by adding new workers because the fixed cost of paying Pt can be spread among more members. In this region, this cost reduction more than offsets the fall in the marginal revenue product of adding new workers in this region. Region 2 is a zone of inactivity with no employment change, despite the fact that the number of insiders exceeds the optimal number. The reason that the insiders choose not to shrink is because this action would reduce the insiders’ current expected per-member surplus. This is because shrinking their size would reduce the total surplus available to the insiders, 20 because total rents are maximized at Nt(wft). Thus, the insiders keep employment constant because any change would reduce their expected payoff. Employment is weakly decreasing in region 3, because in this region the group is sufficiently large that it earns no current surplus above the competitive wage. Thus, insiders may choose to shrink their membership. The employment level at which insiders choose to shed workers depends on the attrition probability parameter and the discount factor. With attrition, new workers will ultimately be added. This means that keeping employment constant, rather than shrinking employment, may be optimal because it postpones the date at which new members would be admitted and thus lets current members receive the future surplus that would otherwise be paid to the new hires. The Firm’s Best Response Here we verify our conjecture that given the insiders’ strategy, the firms’ optimal strategy is to accept any offer (w̄t, n̄t) that yields profits of at least ωΠt(wft). To do so, conjecture that the continuation payoff to the firms from period t+ 1 onwards is given by Wt+1 = ∞∑ τ=t+1 ( Qτ Qt+1 ωΠτ(wfτ) ) .(10) Note that this payoff is independent of the number of workers in the industry at the beginning of period t + 1. Next, consider what happens if firms reject the workers’ offer in period t. With probability ω they behave as a monopolist hiring labor at the competitive wage wft and earn monopoly profits of Πt(wft), and with probability 1− ω they behave competitively and therefore earn no profits. Thus, their expected payoff in period t is ωΠt(wft), and the present value of rejecting the offer is ωΠt(wft) + (Qt+1/Qt)Wt+1. Since the firms’ payoff from accepting the offer is Πt(w̄t, n̄t) + (Qt+1/Qt)Wt+1, the firms’ optimal strategy is to accept an offer of (w̄t, n̄t) if Πt(w̄t, n̄t) ≥ ωΠt(wft) and otherwise reject. Since the workers’ optimal strategy is to offer firms their reservation profit level, then in equilibrium Wt = ωΠt(wft) + (Qt+1/Qt)Wt+1, which is the date t version of (10). This verifies our conjecture for both the firms’ continuation payoff and their optimal strategy, and indicates that their reservation profit level is given by Pt ≡ ωΠt(wft).(11) 21 steady-state ratio of capital to output of about 2. The parameters θ and φ govern industry and sector substitution elasticities. The parameter θ governs the substitution elasticity between goods across industries within a sector. This substitution parameter also appears in business cycle models in which there is imperfect competition. In these models, this parameter governs the mark-up over marginal cost as well as the elasticity of substitution. We choose a substitution elasticity of 10, which is the standard value used in the imperfect competition- business cycle literature. The parameter φ governs the substitution elasticity between goods across the ag- gregated cartelized and non-cartelized sectors. Since we are treating manufacturing as a cartelized sector, we use long-run manufacturing data to determine a range of values for this parameter. The relative price and expenditure share of manufactured goods have declined in the postwar period. These two trends are consistent with a substitution elasticity between manufactured goods and other goods that is less than one. Thus, we consider a unit substitu- tion elasticity (φ = 0) as an upper bound on this parameter, and we also consider substitution elasticities between 1/4 and 1. We found that the results were insensitive to these different values. We therefore chose a value of φ = −1, which implies a substitution elasticity of 1/2. There are three parameters that are specific to our cartel model: π, χ, and ω. The first parameter is the probability that a current cartel worker remains in the cartel the following period. The second parameter is the fraction of industries in the model economy that are cartelized. The third parameter is the probability that a firm in a cartelized industry can act as a monopolist but pay the non-cartel (competitive) wage. The parameter π is the cartel worker attrition rate. We choose π = 0.95, which corresponds to an expected job tenure for a cartel worker of 20 years. We experimented by analyzing two different values that correspond to expected job durations of 10 years and 40 years, respectively. The results were not sensitive to these variations. 6. Evaluating the Steady State Before choosing values for χ and ω, we explore how variations in these values affect the steady state. We consider two values for the parameter χ: 0.25 and 0.50. These values correspond to a 25% share of industries, and a 50% share of industries, respectively, that are 24 cartelized. As we will describe later, 0.25 is a reasonable lower bound on the fraction of the economy that was effectively cartelized. The parameter ω is the probability that an industry fails to reach an agreement with labor but still behaves as a monopolist. We conduct the steady state analysis for a range of values for this probability: .05, .50, 1. Recall that ω = 1 is a model in which labor has no bargaining power, and the industries in fraction χ of the sectors behave as monopolists. We call this version the monopoly model. This version of the model is useful because it shows the quantitative importance of the high wage element of the policy relative to the pure monopoly element of the policy. Table 6 shows aggregate output (y), aggregate employment (n), the cartel (insider) wage (wn), and employment (nm) in the cartel sector divided by their respective competitive steady state values. The table also shows the fraction of workers searching for a cartel job (s). The cartel policy significantly depresses output and employment provided that ω is low. For example, with χ = 0.25 and ω = 0.05, output falls 14 percent relative to competition, and for χ = 0.50 and ω = 0.05, output falls about 25 percent relative to pure competition. Lower output and employment are associated with significant increases in the wage in the cartelized sector. For χ = 0.25 and ω = 0.05, the cartelized wage is about 36 percent above its value in the competitive economy, and for χ = 0.50 and ω = .05, the cartelized wage is about 16 percent. The key depressing element of the policy is not monopoly per se, but rather the link between wage bargaining and monopoly. To see this, note that the cartelized wage in the monopoly version of the model in which labor has no bargaining power (ω = 1) is about the same as the wage in the competitive model. In this case, aggregate output is not much lower than its level in the competitive model. However, fixing the size of the cartelized sector (χ), we see that reducing ω (raising labor’s bargaining power) raises the wage and consequently reduces employment. The link between wage bargaining and monopoly is key because raising the wage above its competitive level in our model requires imperfect competition. In the absence of rents, constant returns to scale and the competitive rental price of capital implies that the wage 25 rate cannot exceed the marginal product of labor. The fact that labor unions aggressively campaigned against antitrust prosecution of firms when New Deal policies began to shift in the late 1930s empirically supports this mechanism in our model (see Hawley, 1966). The impact of the policy also depends on the fraction of the economy covered by the policies (χ). Fixing the value of ω and increasing χ reduces output and employment because more of the economy is cartelized. Note that the policy depresses employment and output in both the cartelized and competitive sectors. This is because the policy has general equilibrium effects that impact on the competitive sector. One such effect is that the policy lowers the competitive wage. This is because lower cartelized output reduces the marginal product of competitive output in the production of final goods. This reduces the value of the marginal product of competitive labor, which in turn reduces employment in the competitive sector.24 Another general equilibrium effect is that the high cartel wage induces some household members to search for high paying cartel jobs. For example, for χ = 0.25, ω = 0.05 about 5 percent of individuals involved in market activity search for a cartel job. For χ = 0.5, ω = 0.05, about 11 percent of workers search for a cartel job. This means that the policy depresses employment more than it depresses labor force participation. In summary, the steady state general equilibrium works as follows. The policy raises the wage in the cartel sector, which reduces output in the cartel sector. This decrease in cartel output affects the competitive wage through its impact on the value of the marginal product of labor in the competitive sector. The low competitive wage and the wage gap between the two sectors reduce employment in the competitive sector, as some individuals choose to search for a cartel job, and some choose to take leisure rather than work for the low competitive wage. The gap between the steady state cartelized wage and the competitive wage is determined solely by the policy parameters (χ and ω), the cartel attrition probability (π), and the interest rate. Thus, search activity has no affect on the cartelized wage because the cartel workers control the size of their group. These results show that a small value of ω will be required to understand the impact of New Deal policies, because wages were substantially above normal in the cartelized sectors. 24This occurs as long as the two intermediate goods are not perfect substitutes. 26 number by dividing trend-adjusted 1933 manufacturing employment by its 1929 value, which yields .58. Table 8 shows output, consumption, investment, employment, searchers divided by the sum of workers and searchers (s), employment in the cartel sector (nm), employment in the competitive sector (nf), the wage in the cartel sector (wm) and the wage in the competitive sector (wf). The table shows the equilibrium path of the cartel model is similar to the actual path of the economy, and sheds light on a number of the puzzles about the weak recovery. Two key puzzles in the data are the low levels of output and labor input. These variables rise from their trough levels between 1934-1936, and are flat afterwards in the data, remaining about 20-25 percent below trend. The cartel model predicts very similar patterns for these variables. They rise between 1934 and 1936, and are flat afterwards. The cartel model economy remains significantly depressed in 1939, though the severity of the depression is less than in the data. Output in the model is 13 percent below its competitive steady state level, and employment is 11 percent below its steady state level. The model also captures the pattern of consumption. Actual consumption is flat throughout the recovery, remaining about 25 percent below trend. The pattern of consumption in the cartel model is also flat, rising from 16 percent below its competitive steady state level in 1934 to 14 percent below in 1939. The cartel model predicts a much stronger investment recovery - an increase from about 60 percent below its competitive steady state level in 1934 to 13 percent below in 1939. While this deviation between theory and data is significant, it is much smaller than the deviation between investment in the competitive model and the data. Investment in the competitive model is 18 percent above its competitive steady state level in 1936. This stands in contrast to investment in the cartel model, which is 12 percent below the competitive steady state level. We now turn to discussing some other features of the data and the corresponding predictions of the model. The manufacturing wage, which take to be a cartelized wage in the data, rises from 11 percent above trend in 1934 to about 20 percent above trend at the end of the decade. The cartelized wage in the model exhibits a similar increase. It rises from about 15 percent above its competitive steady state level in 1934 to 20 percent by 1939. While the parameter ω was chosen so that the steady state wage is 20 percent above the competitive 29 steady state level, this choice places no restrictions on the time path of the cartelized wage as it converges to its steady state value. Thus, the model reproduces the time path in the cartel wage over the recovery period. The wage in the competitive sectors of our cartel model is significantly below its competitive steady state level, despite normal productivity growth. It is 20 percent below its competitive steady state level in 1934, and remains 17 percent below in 1939. While there is no corresponding wage measure in the data for comparison, there is evidence that wages outside of manufacturing were below trend during the 1934-1939 period. We constructed a measure of real compensation per hour in the non-manufacturing and non-mining sectors by dividing compensation of employees in the non-manufacturing, non-mining sectors by hours worked in the non-manufacturing, non-mining sectors. This hourly compensation measure is about 18 percent below trend in the late 1930s, which is similar to the cartel model’s competitive wage. The adoption of the cartel policy in our model generates monopoly rents. It is hard to find profit measures in the data for direct comparison to these theoretical monopoly rents, but it is interesting that manufacturing accounting profits rose significantly after the NIRA was adopted, and rose faster than profits in other sectors. Our model also predicts the fraction of individuals in the market sector who search for a job. The number of searchers in our model, divided by the number who are either working or searching, is 11 percent during the early part of the transition, and then declines to about five percent. The initial number of searchers is high because insiders add workers in the first two years, which raises the probability of obtaining a cartel job. Insiders add new workers because the initial number of insiders are low relative to the steady state, and because the time path of TFP rises over time, which in turn raises the reservation profit level of the firm. Darby (1976) reports that unemployment ranged between 9 and 16 percent between 1934 and 1939. Thus, the model is consistent with the persistently high unemployment that occurred during the New Deal. We now turn to a discussion of the predicted patterns in output and labor input over time. Both of these variables rise initially. This may seem counterintuitive - why does the adoption of the cartel policy lead initially to some recovery? One factor is that the initial 30 stock of workers in the cartelized sector in the model is small relative to its steady state value because of the large employment loss during the Depression. This leads the insiders to expand their group size. Another factor is the rising time path of productivity. This increases the firm’s reservation value and the marginal revenue product of labor in 1935 and 1936, which leads the cartel to add additional workers during those years as well. This increase in cartel employment raises the probability of finding a cartel job, which raises the number of cartel job searchers in 1934 and 1935. Thus, our model sheds light on the initial recovery from the Depression, as well as the lack of full recovery. We have evaluated the robustness of our results to changes in assumptions about job search, about differences in cartelization intensity across industries, and about the lack of any monopoly prior to the policies. The results are robust to these changes. The Appendix discusses these experiments in detail. 8. Conclusion The recovery from the Great Depression was weak, and was accompanied by significant increases in real wages and prices in several sectors of the economy. A successful theory of the recovery from the Depression should account for persistent low levels of consumption, investment, and employment, the high real wage, and reduced competition in the labor market. We developed a model with New Deal labor and industrial policies that can account for sectoral high wages, a distorted labor market, and depressed employment, consumption, and investment, despite rapid productivity growth. Our results show that New Deal policies are important, accounting for about 60 percent of the weak recovery. The key depressing element behind New Deal policies was not monopoly per se, but rather linking collusion with paying high wages. Our model indicates that these policies reduced output, consumption, and investment about 13 percent relative to their competitive steady state levels. Thus, the model accounts for about half of the weak recovery in output and helps explain why the initial recovery stalled by the late 1930s. New Deal labor and industrial policies did not lift the economy out of the Depression as Roosevelt had hoped. Instead, the joint policies of increasing labor’s bargaining power and linking collusion with paying high wages prevented a normal recovery by creating rents and an 31 [23] Kendrick, John W. 1961. Productivity trends in the United States. Princeton, N.J.: Princeton University Press. [24] Kennedy, David M. Freedom From Fear: The United States, 1929-1945, Oxford History of the United States, vol. 9, 1999. [25] Lewis, H. Gregg, Unionism and Relative Wages in the United States. The University of Chicago Press. 1963 [26] Lucas, R. and L. Rapping, Unemployment in the Great Depression: Is there a Full Explanation? JPE, 1972, vol 80, no. 1, 186-191. [27] Lyon, L., P. Homan, L. Lorwin, G. Terborgh, C. Dearing, L. Marshall. The National Recovery Administration: An analysis and Appraisal, The Brooking Institution, Wash- ington D.C., 1935. [28] Mills, Harry and Emily Brown, From the Wagner Act to Taft-Hartley, The University of Chicago Press, 1950. [29] The National Recovery Administration, Report of the President’s Committee of Indus- trial Analysis, U.S. Committee of Industrial Analysis, 1937, USGO [30] Office of National Recovery Administration, Division of Review, - History of the Com- pliance Division - by W.M. Galvin, J.J. Reinstein, D.Y. Campbell, Work Materials No. 85, March 1936 [31] Office of National Recovery Administration, Division of Review, - Legal Aspects of Labor Problems - Minimum Wages, by Melvin Sims, Work Materials No. 43, Feb. 1936 [32] Pierce, Phyllis. The Dow Jones Averages: 1885-1980; Dow Jones & Co., . Homewood, Ill. 1982. [33] Posner, R.A., “A Statistical Analysis of Antitrust Enforcement,” Journal of Law and Economics (October 1970) vol. 13, p. 365-420. [34] Posner, R.A. The Robinson-Patman Act, 1976, American Enterprise Institute. 34 [35] Reynolds, Lloyd and Cynthia Taft. The Evolution of Wage Structure. Yale University Press, New Haven, 1956. [36] Roose, K.D.. The Economics of Recession and Revival, Yale Univ. Press, New Haven, 1954 [37] Ross, Arthur M. Trade Union Wage Policy, University of California Press, Berkely, CA, 1948. [38] Taft, P. Organized Labor in American History - Harper and Row New York 1964 [39] Taylor, Benjamin and Fred Whitney. Labor Relations Law, 1971, Prentice-Hall, NY [40] US Gov printing Office- Codes of Fair Competition, nos. 1-.1933-34 - many volumes. [41] Weinistein, Michael. Recovery and Redistribution Under the NIRA, North Holland Pub- lishing Co., 1980. 9. Appendix This appendix presents the equilibrium conditions in the model, constructs the bal- anced growth path equilibrium, presents proofs of the propositions, and summarizes the computation of the equilibrium. We begin with the equilibrium conditions. The households’ first order conditions include the following equations for optimal choices of consumption, labor input in the com- petitive sector, investment, labor input in the cartel sector, and search for a cartel job. βt 1 ct = Qtλ(14) βt A 1− nt = λQtwft,(15) Qt+1[rs,t+1 + 1− δ]−Qt = 0,(16) Qtwmtλ−Qtξt +Qt+1πξt+1 = β tA 1 1− nt (17) Qt+1υtξt+1 = β tA 1 1− nt ,(18) where λ is the Lagrange multiplier on the budget constraint (3) and ξt is the Lagrangian multiplier on the market hours constraint (5). 35 Cartel Job Acquisition (15) and (16) can be used to solve for the equilibrium probability of receiving a cartel job from searching. Assuming that limτ→∞Qt+τπ τξt+τ/Qt = 0, the value of being a cartel worker is ξt = λ Qt ∞∑ τ=0 Qt+τπ τ(wmt+τ −wft+τ). Thus, the value to a household member of being in the cartel is the expected discounted value of the cartel wage premium. Combining this expression with the time cost of searching for a cartel job from (17) yields υt−1 ∞∑ τ=0 Qt+τπ τ(wmt+τ −wft+τ ) = Qt−1wt−1.(19) This condition determines the equilibrium probability of finding a cartel job. A. Deriving the Insider’s Maximization Problem We derive (9). Start by taking as given the sequence of offers {w̄t, n̄t} and note that the present value of lifetime earnings of the insiders (workers in the cartel at the beginning of the period), assuming that they work in the competitive sector if they leave the cartel, is implicitly given by ntWt = min [nt, n̄t] w̄t +max [0, nt − n̄t]Xt +β Qt+1 Qt {πmin [nt, n̄t]Wt+1 + (1− π)min [nt, n̄t]βXt+1} , where Wt denotes the present value of lifetime earnings to an insider in period t and Xt denotes the present value of lifetime earnings to a worker in a competitive industry, where Xt = wft + Qt+1 Qt Xt+1. In the period t flow payoff, min [nt, n̄t] is the number of insiders who continue working in the industry this period and max [0, nt − n̄t] is the number who are laid off and work in a competitive industry. The future payoff to those who are not laid off in period t accounts for the fact that between periods the fraction 1−π of the cartel workers (insiders who work that period plus new members added to the cartel) will suffer attrition. Since [Wt −Xt] = Vt(nt), we obtain (9). 36 Since the balanced growth path level of employment in the cartel industries is constant at nm, and nm > πnm, it follows that the conditions in proposition 2 hold, and nm satisfies θpmγz γ(km/nm) 1−γ − ( pm(znm) γk1−γm − rkm − P nm ) = 0.(30) Since firms are acting as a monopolist, the following condition must also hold θpm(1− γ)(znm/km) γ − r = 0.(31) The cartel wage rate is given by wm = pm(znm) γk1−γm − rkm − P nm (32) The probability of a searcher obtaining a cartel job, υ, along the balanced growth path is given by (19): β 1− πβ (wm − wf )υ = wf .(33) Therefore, the number of searchers is ns = (1− π)nm/υ.(34) Equations (20)- (34), along with the industry production functions, yield a system of equations with which to determine (c, wi, xi, ni, r, yi, pi, n, ns, y, P, υ) for i = m or f, and thus characterize the balanced growth path of the cartel model. When ω = 1, this model is simply a two-sector model in which the fraction m of the intermediate goods producers are monopolists and the fraction 1 − m are competitive. To see this note in this case P is simply monopoly profits, and from condition (32) w̄ = w, and hence that condition (30) is the same as the monopolist’s f.o.c. with respect to labor . As ω → 0, the effective wage in the cartel sector is approaching (pm ((znm) γk1−γm )− rkm)/nm = pmγ(znm) γk1−γm , and hence nm → 0. Finally, note that as θ → 1, the market power of the industry disappears, and condition (30) is the same as the monopolist’s f.o.c. for labor. In this case, the cartel equilibrium converges to the competitive equilibrium. 39 C. Proof of Proposition 1 The proof of (i) is by contradiction. If Πt(w̄, n̄) > Pt, then the workers could raise w̄, keeping n̄ the same, and raising the value of the objective function. The proof of (ii) is by contradiction. Assume that n̄t < nt, and note that by setting n̄t = nt and keeping n̄t+1 unchanged, then the workers current return is higher and their expected future is unchanged. To see that their current payoff is higher, note that w̄t is higher (given that it is set according to 1(i)) and they receive this return with probability one. To see that their expected future return is unchanged, note first that the likelihood that an initial worker in period t remained employed in period t+1 was (n̄t/nt)πmin(n̄t+1/πn̄t, 1). Under the proposed deviation, there are no layoffs in period t, but the higher layoffs in period t + 1 just offset this and the probability of working in period t + 1 for an initial worker in period t is unchanged by construction. Hence, their future payoff is unchanged, since the payoff per worker who is employed in period t + 1 is unchanged. If n̄t+1 is chosen optimally given that the number of initial workers in period t+1 is πnt, the future payoff could be even higher: since Vt+1(πnt) is optimal, Vt+1(πnt) ≥ (n̄t/nt)Vt+1(πnt). The proof of (iii) is by contradiction. As in the proof of (ii), consider deviating and setting employment to nt and the wage according to 1(i). Since the total profits earned by the workers are Πt(0, n̄t)− Pt in period t, we need only show that Πt(0, nt)− Pt − ntwt nt + πQt+1 Qt ( min [ 1, n̄t+1 πnt ]) w̄t+1 − wt+1+ π(Qt+2/Qt+1)Vt+2(πn̄t+1)   ≥(35) Πt(0, n̄t)− Pt − n̄twt nt + n̄t nt πQt+1 Qt ( min [ 1, n̄t+1 πn̄t ]) w̄t+1 − wt+1+ π(Qt+2/Qt+1)Vt+2(πn̄t+1)   Note that ( min [ 1, n̄t+1 πnt ]) = n̄t nt ( min [ 1, n̄t+1 πn̄t ]) and therefore the second terms are equal in the two expressions by construction. Hence we need only show that Πt(0, nt)− Pt − ntwt nt > Πt(0, n̄t)− Pt − n̄twt nt ,(36) which follows trivially from the fact that nt ≤ Nt(wt), and the profit function Πt(wt, nt) is concave in nt. The proof of (iv) is similar to (iii). We again need to show that (35) is satisfied, and 40 this follows trivially from the assumption that n̄t > Nt(wt). D. Proof of Proposition 2 The proof follows trivially from the fact that w∗t is the maximal wage rate in period t, and that therefore the value of (9) is bounded above by ∑ ∞ t=0 πQt(w ∗ t −wt), and this sequence achieves that bound. The uniqueness of the sequence follows from the fact that Π is strictly decreasing in w. E. Convergence We have not proved that the equilibrium sequences in our model monotonically con- verge, but our model simulations suggest they do. Proposition 2 covers the case where em- ployment starts at or below the balanced growth path level (n∗t ). It shows that if employment starts at or below n∗0 and the sequence n ∗ t decreases at a rate less than 1− π, the maximum wage and minimum employment level are chosen in each period. Propositions 1(iii) covers the case when initial employment, n0 : N0(wf0) ≥ n0 > n ∗ 0 and convergence is sufficiently monotonic. In this case, the employment level decays at least at the rate 1− π down to n∗t , where it remains thereafter. F. Robustness Experiments The first experiment evaluates the importance of our search friction by eliminating it. Instead, cartel jobs were simply randomly allocated among households. Without job search, steady state output fell 11 percent, compared to 13 percent with job search. The second experiment evaluates our assumption that the average 20 percent wage pre- mium in the manufacturing sector is due to all of these industries being identically cartelized, rather than some having higher wage premia, and some having lower wage premia. To evalu- ate this, we conducted an experiment in which the measured wage premium is a combination of some highly cartelized sectors, and some competitive sectors. We therefore reduced χ from its original value of .32 by 25 percent, and reduced ω from its value of .10 such that our analog to the measured manufacturing wage, ŵ, still produced the measured 20 percent premium: ŵ(χ, ω) = χnm(χ, ω)wm(χ, ω) + (.32− χ)nf (χ, ω)wf (χ, ω) χnm(χ, ω) + (.32− χ)nf(χ, ω) . where all objects in this equation are detrended balanced growth path value of these variables 41 Table 3: Monthly Wages Relative to GNP deflator (2/33 = 100) Dates 4/33 12/33 6/34 5/35 12/35 6/36 Leather Tanning 96.6 124.0 122.2 121.9 123.0 124.9 Boots and Shoes 104.7 145.9 138.1 139.0 139.7 137.0 Cotton 96.7 142.0 133.2 135.2 133.4 134.3 Iron/Steel 100.2 123.1 122.7 124.6 125.0 127.0 Foundaries and Machine Shops 99.4 112.6 111.9 113.4 113.6 115.9 Autos 98.9 115.5 121.3 121.0 123.1 125.8 Chemical 102.8 117.6 118.2 121.5 123.1 124.1 Pulp/Paper 100.7 117.5 111.4 115.3 116.4 117.9 Rubber Manufacturing 100.7 121.3 125.9 134.1 137.0 128.6 Furniture 102.3 118.9 125.9 129.2 129.0 130.3 Farm Implements 96.5 107.1 105.6 115.3 116.9 113.7 Table 4: Price of Investment Goods and Farm Goods Relative to Personal Consumption Services (1929=100) Year 1930 1931 1932 1933 1934 1935 1936 1937 1938 1939 Fixed Investment 96.9 95.1 93.2 99.9 108.3 110.0 109.5 115.0 114.0 112.5 Durable Equipment 97.1 98.1 101.8 99.5 110.2 109.6 107.6 111.3 113.4 111.3 44 Table 5: Wholesale Prices Relative to Personal Consumption Services deflator (2/33 = 100) Dates 4/33 12/33 6/34 5/35 12/35 6/36 6/37 6/38 6/39 Leather/Hides 102.1 131.2 126.1 127.5 137.8 126.7 128.5 143.0 121.1 Textiles 131.8 149.2 143.8 133.1 140.4 131.9 142.3 116.9 120.1 Furniture 99.4 110.3 108.1 105.3 105.3 103.9 112.2 106.2 103.0 All Home Furnishings 98.9 112.0 111.6 109.5 109.5 107.9 115.3 110.1 108.2 Anthracite Coal 91.8 91.9 85.3 80.8 91.8 84.1 78.2 76.8 77.8 Bituminous Coal 98.4 114.1 117.8 117.0 119.3 117.8 115.6 112.2 110.1 Petroleum Products 94.8 150.4 145.2 145.2 142.6 162.4 167.0 150.0 139.9 Chemical 100.6 100.3 97.9 108.8 108.8 107.8 104.6 99.7 97.4 Drugs/Pharmaceuticals 99.6 107.7 131.3 133.0 133.0 138.6 144.8 127.4 129.1 Iron/Steel 97.9 108.2 97.0 114.6 108.7 108.2 120.2 119.3 112.6 Non-Ferrous Metals 106.5 144.2 145.9 147.1 147.1 146.8 185.3 133.0 144.2 Structural Steel 100.0 106.2 113.8 110.6 110.6 109.7 131.0 126.4 120.0 All Metal Products 99.4 107.9 111.5 109.9 110.1 107.9 115.4 113.5 110.1 Autos 99.4 100.0 102.9 102.0 102.0 n.a. n.a. 96.5 93.5 Pulp/Paper 98.1 114.4 114.0 108.5 108.5 107.1 122.8 108.4 101.3 Auto Tires 87.8 101.4 103.0 103.7 103.7 102.3 123.3 123.2 129.8 Rubber 121.3 295.1 446.9 400.8 400.8 413.0 626.2 394.1 515.5 Farm Equipment 100.0 102.4 107.9 110.6 118.8 109.8 105.5 105.7 102.7 All Bldg. Materials 100.6 122.6 123.8 119.3 119.3 119.1 129.3 117.5 117.2 Average27 103.2 117.1 120.0 122.6 123.7 116.8 124.6 117.9 113.8 27The average does not include rubber. 45 Table 6: Cartel Model Steady State Variables Relative to Competitive Model Steady State Variables χ = 0.25 φ ω y n wm nm s 0 1.00 0.97 0.98 0.96 0.91 0.00 -1 1.00 0.97 0.98 0.96 0.94 0.00 -2 1.00 0.97 0.98 0.96 0.96 0.00 0 0.50 0.94 0.96 1.04 0.82 0.01 -1 0.50 0.94 0.95 1.04 0.87 0.01 -2 0.50 0.95 0.95 1.04 0.89 0.01 0 0.05 0.86 0.90 1.35 0.57 0.04 -1 0.05 0.85 0.88 1.34 0.67 0.05 -2 0.05 0.86 0.87 1.34 0.70 0.06 χ = 0.50 φ ω y n wm nm s 0 1.00 0.94 0.96 0.93 0.91 0.00 -1 1.00 0.94 0.96 0.93 0.93 0.00 -2 1.00 0.93 0.96 0.93 0.94 0.00 0 0.50 0.89 0.92 0.98 0.82 0.02 -1 0.50 0.89 0.92 0.98 0.86 0.02 -2 0.50 0.89 0.91 0.98 0.87 0.02 0 0.05 0.76 0.81 1.18 0.58 0.09 -1 0.05 0.75 0.79 1.16 0.65 0.11 -2 0.05 0.75 0.78 1.15 0.67 0.11 46