Wage Rigidity During the Great Depression: Plant-Level Evidence

Abstract

Conventional wisdom posits that sticky wages were a key factor in deepening and prolonging the Great Depression. It is also argued that leaders of large businesses sought to delay or minimize wage reductions to preserve workers' purchasing power. However, these claims have not been rigorously tested against micro-level data. This paper examines the wage-setting behaviors of individual employers during the Great Depression using plant-level microdata from the biennial Census of Manufactures (1929-1935). The analysis reveals that wages were rigid in both nominal and real terms during the first two years of the downturn. Between 1931 and 1933, however, wages declined more sharply than consumer and wholesale price indices. Importantly, these larger reductions in hourly wages were often accompanied by smaller reductions-or even increases-in working hours, helping workers maintain their labor income. Furthermore, this paper demonstrates that relying on aggregate data to measure wage rigidity can lead to overestimation. Plants that closed between 1929 and 1931 tended to pay significantly lower wages, introducing a composition bias commonly found in individual-level studies.