A Helicopter Tour of Competing Theories of Wage Rigidity, As Applied to the Great Depression

This paper evaluates competing theories of wage rigidity against available quantitative and qualitative evidence from the 1930s. I focus on five explanations of wage stickiness in particular: institutional impediments to wage adjustment; labor-supply explanations; efficiency wages; implicit contracts; and insider-outsider models. The quantitative evidence includes results of cross-industry regressions on the 1929-31 percent change in hourly earnings and the 1929 level of hourly earnings, as well as various data on wage changes, hours, turnover, and strikes. Labor-supply explanations are found wanting, as are models that attribute wage stickiness to employer efforts to reduce labor turnover. Versions of efficiency wage and implicit contract theories that emphasize worker morale fare the best, as they are consistent with several empirical regularities and with the statements of contemporaries.