Re-Examining the Role of Sticky Wages in the U.S. Great Contraction: A Multisector Approach

Working papers of the Federal Reserve Bank of Cleveland are preliminary materials circulated to stimulate discussion and critical comment on research in progress. They may not have been subject to the formal editorial review accorded offi cial Federal Reserve Bank of Cleveland publications. The views stated herein are those of the authors and are not necessarily those of the Federal Reserve Bank of Cleveland or of the Board of Governors of the Federal Reserve System. We quantify the role of contractionary monetary shocks and wage rigidities in the U.S. Great Contraction. While the average economy-wide real wage varied little over 1929–33, real wages did rise signicantly in some industries. We calibrate a two-sector model with intermediates to the 1929 U.S. economy, where wages in one sector adjust slowly. We fi nd that nominal wage rigidities can account for less than a fi fth of the fall in GDP over 1929–33. Intermediate linkages play a key role, as the output decline in our benchmark is roughly half as large as in our two-sector model without intermediates.