Relative wage setting, contracts and unemployment during the deflations of 1920-22 and 1931-34 in Sweden

Recent research on the Great Depression has concluded that a worldwide decline in aggregate demand, emanating from the United States, was propagated into a fall in real activity through sticky nominal wages. The question remains: Why were nominal wages so sticky? I examine two hypotheses based on relative wage setting. Based on a wide range of evidence for Sweden, I argue that the 1920-22 depression is compatible with the staggered wage contract model and the 1930s depression with the co-ordination failure model.