Scandinavian Working Papers in Economics

Working Papers,
Lund University, Department of Economics

No 1999:2: Relative wage setting, contracts and unemployment during the deflations of 1920-22 and 1931-34 in Sweden

Klas Fregert ()
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Klas Fregert: Department of Economics, Lund University, Postal: Department of Economics, School of Economics and Management, Lund University, Box 7082, S-220 07 Lund, Sweden

Abstract: 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.

Keywords: Wage contracts; Fischer-Taylor model; unemployment; Sweden; Depression; relative wage setting

JEL-codes: E31; E32; E65

43 pages, First version: March 4, 1999. Revised: April 21, 1999.

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