Real origins of the great depression: monopoly power, unions and the American business cycle in the 1920s

Ebell, Monique and Ritschl, Albrecht (2008) Real origins of the great depression: monopoly power, unions and the American business cycle in the 1920s. CEPDP (876). London School of Economics and Political Science. Centre for Economic Performance, London, UK. ISBN 9780853282839

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Abstract

We attempt to explain the severe 1920-21 recession, the roaring 1920s boom, and the slide into the Great Depression after 1929 in a unified framework. The model combines monopolistic product market competition with search frictions in the labor market, allowing for both individual and collective wage bargaining. We attribute the extraordinary macroeconomic and financial volatility of this period to two factors: Shifts in the wage bargaining regime and in the degree of monopoly power in the economy. A shift from individual to collective bargaining presents as a recession, involving declines in output and asset values, and increases in unemployment and real wages. The pro-union provisions of the Clayton Act of 1914 facilitated the rise of collective bargaining after World War I, leading to the asset price crash and recession of 1920-21. A series of tough anti-union Supreme Court decisions in late 1921 induced a shift back to individual bargaining, leading the economy out of the recession. This, coupled with the lax anti-trust enforcement of the Coolidge and Hoover administrations enabled a major rise in corporate profits and stock market valuations throughout the 1920s. Landmark pro-union court decisions in the late 1920s, as well as political pressure on firms to adopt the welfare capitalism model of high wages, led to collapsing profit expectations, contributing substantially to the stock market crash. We model the onset of the Great Depression as an equilibrium switch from individual wage bargaining to (actual or mimicked) collective wage bargaining. The general equilibrium effects of this regime change are consistent with large decreases in output, employment, and stock prices and moderate increases in real wages.

Item Type:	Monograph (Discussion Paper)
Official URL:	http://cep.lse.ac.uk
Additional Information:	© 2008 the authors
Divisions:	Economic History Centre for Economic Performance
Subjects:	H Social Sciences > HC Economic History and Conditions
JEL classification:	N - Economic History > N1 - Macroeconomics and Monetary Economics; Growth and Fluctuations > N12 - U.S.; Canada: 1913- J - Labor and Demographic Economics > J5 - Labor-Management Relations, Trade Unions, and Collective Bargaining > J51 - Trade Unions: Objectives, Structure, and Effects J - Labor and Demographic Economics > J6 - Mobility, Unemployment, and Vacancies > J64 - Unemployment: Models, Duration, Incidence, and Job Search E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Employment, and Investment > E24 - Macroeconomics: Employment; Unemployment; Wages; Intergenerational Income Distribution (includes wage indexation) E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Employment, and Investment > E27 - Forecasting and Simulation N - Economic History > N2 - Financial Markets and Institutions > N22 - U.S.; Canada: 1913-
Date Deposited:	17 Jul 2008 10:05
Last Modified:	15 Sep 2023 23:11
URI:	http://eprints.lse.ac.uk/id/eprint/19566

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