Unemployment, Inflation, and Wages in the American Depression: Are There Lessons for Europe Ben Bernanke Martin Parkinson National Bureau of Economic Research Februrary 1989
This paper discusses whether there are lessons to be drawn from the 1930’s depression in America, to the situation in Europe in the late 1980’s • The comparison reveals some important differences: • Persistent unemployment in 1930’s reflected much larger shocks, and less low level equilibrium trap, than does modern Europe. • The self correcting tendencies of the US Economy in 1930’s were much stronger than acknowledged.
Bernanke and Parkinson look at the 1930’s Depression to help explain three “puzzles” raised by the European Unemployment Problem. They include: • The persistence of high unemployment • The apparent lack of impact of high unemployment on the rate of inflation • The phenomenon of increasing real wages despite high unemployment
Persistent Unemployment • Bernanke and Parkinson argue that unexpected inflation must be added to the Phillips Curve, producing an Error-Correction Phillips Curve (ECPC). • With the addition of this variable this implies rather rapid movement of the economy toward full employment. • Argue that the US economy was a “natural rate economy”, rather than a “low-level trap” economy.
The Floating NAIRU • They argue that inflation has no effect on unemployment. Instead the supply and demand of money determine current and expected inflation rates.
Real Wage Rigidity • The 1930’s saw a large increase in real wage rates despite high unemployment levels. • Decline in average hours per work week, productivity growth, and industrial unionism were all factors of the high real wage. • Political climate also changed greatly to fight for workers rights.
Conclusions • The depression era confirms modern macro theory that the level of unemployment has little independent influence on the rate of inflation. • Political factors play a crucial roll in the the process of real wage determination.