Real Origins of the Great Depression: Monopoly Power, Unions and the American Business Cycle in the 1920sMonique Ebell () and Albrecht Ritschl CEP Discussion Papers from Centre for Economic Performance, LSE Abstract: We attempt to explain the severe 1920-21 recession, the roaring 1920s boom, and the slide into theGreat Depression after 1929 in a unified framework. The model combines monopolistic productmarket competition with search frictions in the labor market, allowing for both individual andcollective wage bargaining. We attribute the extraordinary macroeconomic and financial volatility ofthis period to two factors: Shifts in the wage bargaining regime and in the degree of monopoly powerin the economy. A shift from individual to collective bargaining presents as a recession, involvingdeclines in output and asset values, and increases in unemployment and real wages. The pro-unionprovisions 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 Courtdecisions in late 1921 induced a shift back to individual bargaining, leading the economy out of therecession. This, coupled with the lax anti-trust enforcement of the Coolidge and Hooveradministrations enabled a major rise in corporate profits and stock market valuations throughout the1920s. Landmark pro-union court decisions in the late 1920s, as well as political pressure on firms toadopt the welfare capitalism model of high wages, led to collapsing profit expectations, contributingsubstantially to the stock market crash. We model the onset of the Great Depression as an equilibriumswitch from individual wage bargaining to (actual or mimicked) collective wage bargaining. Thegeneral equilibrium effects of this regime change are consistent with large decreases in output,employment, and stock prices and moderate increases in real wages. Keywords: Trade unions; collective bargaining; Great Depression (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: http://EconPapers.repec.org/RePEc:cep:cepdps:dp0876 Access Statistics for this paper More papers in CEP Discussion Papers from Centre for Economic Performance, LSE |
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