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Sticky Wages and the Great Depression: Evidence from the United Kingdom

Journal: European Review of Economic History

Date: 20230501

Author: Lennard, Jason

Abstract:
How sticky were wages during the Great Depression? Although classic accounts emphasise the importance of nominal rigidity in amplifying deflationary shocks, the evidence is limited. In this paper, I calculate the degree of nominal wage rigidity in the United Kingdom between the wars using new granular data covering millions of wages. I find that nominal wages changed infrequently but that wage cuts were more common than wage rises on average. Nominal wage adjustment fluctuated over time and by state, so that in 1931 amid falling output and prices more than one-third of workers received wage cuts.

Link: Google Scholar

Key Findings

Wage Changes Were Infrequent

On average, wages adjusted every 3.6 years, with 72.3% of workers having frozen wages annually during 1923-1936

Wage Cuts Common in Depression

During 1931, over 36% of workers (>3 million people) received wage cuts, showing significant downward flexibility during crisis

Industry Variations

Transport sector was 10x more flexible than other industries, with 63.4% of workers experiencing wage changes vs 6.1% in other sectors

Frequency of Wage Changes Over Time

  • Shows the percentage of employees receiving nominal wage changes between 1923-1936
  • Peak flexibility in 1923 (54.6%) and lowest in 1933 (13.9%)
  • Demonstrates how wage adjustment varied significantly through economic cycles

Industry-Level Wage Flexibility

  • Compares wage change frequencies across different industries
  • Transport sector most flexible (63.4%), other industries least flexible (6.1%)
  • Shows substantial heterogeneity in wage adjustment across economic sectors

Methods of Wage Adjustment

  • Details how wage changes were implemented during 1930-1932
  • 33.7% through sliding scales, 33.2% through direct negotiation
  • Illustrates the institutional mechanisms for wage adjustment during Depression

Contribution and Implications

  • First comprehensive analysis of wage rigidity in interwar Britain using granular data
  • Challenges conventional view that wages were uniformly rigid during Great Depression
  • Provides evidence that British labor market showed more wage flexibility than modern economies during crises

Data Sources

  • Wage Changes Chart: Based on Figure 2 using Ministry of Labour data (1937)
  • Industry Chart: Constructed from Table 4 showing industry-level wage adjustment frequencies
  • Methods Chart: Derived from textual data in Section 8 on means of adjustment