Nominal Wage Stickiness and Aggregate Supply in the Great Depression.

Building on earlier work by Barry Eichengreen and Jeffrey Sachs, the authors use data for twenty-two countries to study the role of wage stickiness in propagating the Great Depression. Recent research suggests that monetary shocks, transmitted internationally by the gold standard, were a major cause of the Depression. Accordingly, the authors use money supplies and other aggregate demand shifters as instruments to identify aggregate supply relationships. They find that nominal wages adjusted quite slowly to falling prices and that the resulting increases in real wages depressed output. These findings leave open the question of why wages were so inertial in the face of extreme labor market conditions. Copyright 1996, the President and Fellows of Harvard College and the Massachusetts Institute of Technology.