Real Wages, Productivity, and Unemployment in Britain and Germany during the 1920′s

Abstract

This paper links together separate national debates on the role of real wages in high unemployment in Britain and Germany during the 1920′s. Real wage growth outstripped labor productivity growth in both countries during the 1920′s, raising the natural rate of unemployment. Econometric labor demand functions are used to provide the link between high real wages and unemployment. In addition, excessive real wage growth had adverse effects on investment. This helps to explain the failure of Britain and Germany to benefit from the catch-up possibilities opened up by rapid U.S. productivity growth.