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Industry Relations In Us

We attempt to explain the severe 1920-21 recession, the roaring 1920s boom, and the slide into the
Great Depression after 1929 in a unified framework. The model combines monopolistic product
market competition with search frictions in the labor market, allowing for both individual and
collective wage bargaining. We attribute the extraordinary macroeconomic and financial volatility of
this period to two factors: Shifts in the wage bargaining regime and in the degree of monopoly power
in the economy. A shift from individual to collective bargaining presents as a recession, involving
declines in output and asset values, and increases in unemployment and real wages. The pro-union
provisions of the Clayton Act of 1914 facilitated the rise of collective bargaining after World War I,
leading to the asset price crash and recession of 1920-21. A series of tough anti-union Supreme Court
decisions in late 1921 induced a shift back to individual bargaining, leading the economy out of the
recession. This, coupled with the lax anti-trust enforcement of the Coolidge and Hoover
administrations enabled a major rise in corporate profits and stock market valuations throughout the
1920s. Landmark pro-union court decisions in the late 1920s, as well as political pressure on firms to
adopt the welfare capitalism model of high wages, led to collapsing profit expectations, contributing
substantially to the stock market crash. We model the onset of the Great Depression as an equilibrium
switch from individual wage bargaining to (actual or mimicked) collective wage bargaining. The
general equilibrium effects of this regime change are consistent with large decreases in output,
employment, and stock prices and moderate increases in real wages.
The period between World War I and the New Deal was a time of extraordinary macroeconomic
volatility. This short time span was punctuated by two sharp recessions,
separated by a long and sustained expansion. At the same time, asset...