Essays on the Great Depression

By Ben S. Bernanke | Go to book overview
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Unemployment, Inflation, and Wages in the
American Depression: Are There Lessons for Europe?


ANALYSTS OF THE CONTEMPORARY European unemployment problem (Robert J. Gordon, 1988, being the most recent) have with some frequency drawn comparisons with the experience of the 1930s. In one sense, this comparison is unwarranted: While today’s European unemployment is a serious matter, its impact on human welfare is an order of magnitude less than what was wrought by the Great Depression. From a scientific perspective, however, the possibility that analogous mechanisms generated persistent unemployment in the 1930s and the 1980s makes the comparison an interesting one.

In this paper, we consider whether the American experience of the 1930s can teach us anything about three “puzzles” raised by the current European unemployment problem. These widely discussed issues are: 1) the persistence of high unemployment (equivalently, the apparent failure of the economy’s homeostatic, or self-correcting, mechanisms); 2) the apparent lack of impact of high unemployment on the rate of inflation (the “floating NAIRU”); and 3) the phenomenon of increasing real wages despite high unemployment (“real wage rigidity”). We focus here on the manufacturing sector, where the data are best; obviously, extensions to other sectors would be desirable.

The comparison of America in the 1930s and Europe in the 1980s reveals some important differences; most strikingly, in the dynamics of unemployment. The persistence of unemployment in the 1930s reflected to a much greater degree a sequence of large destabilizing shocks (in 1929–33 and 1937–38), and much less a low-level equilibrium trap, than does modern European unemployment. The self-correcting tendencies of the 1930s economy were probably much stronger than is generally acknowledged.

However, the depression era confirms the modern observation that the level of unemployment has little independent influence on the rate of inflation—an observation that, we argue, is consistent with macro theory. The

Reprinted with permission from AER Papers and Proceedings, Vol. 79 (May 1989), 210–14.
We thank the Olin Foundation for support. Brad De Long, our Princeton colleagues, and
members of the Berkeley macro history seminar provided helpful suggestions.


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