Efficiency Wages, Insiders and Outsiders, and the Great Depression

Abstract

This paper uses available quantitative and qualitative evidence from the I930s to evaluate two prominent explanations of the wage explosion of the New Deal years of 1933-41: efficiency wages and insider-outsider models. The quantitative evidence includes various data on wage changes, hours, turnover, and strikes. Economically-based efficiency-wage models and the insider-outsider model are found wanting as explanations of 1930s labor markets. Efficiency-wage theories that emphasize worker morale fare better. This paper explains the 1930s wage burst as an interaction between New Deal policies and efforts by employers to maintain worker morale and productivicy in a climate of growing union strength.