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Wage and employment determination in volatile times: Sweden 1913–1939

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Abstract

The paper studies wage and employment determination in the Swedish business sector from the mid-1910s to the late 1930s. This period includes the boom and bust cycle of the early 1920s as well as the Great Depression of the early 1930s. The events of the early 1920s are particularly intriguing, involving inflation running at an annual rate of 30 percent followed by a period of sharp deflation where nominal wages and prices fell by 30 percent and unemployment increased from 5 to 30 percent. We examine whether relatively standard wage and employment equations can account for the volatile economic development during the interwar years. By and large, the answer is a qualified yes. Industry wages were responsive to industry-specific firm performance, suggesting a significant role for “insider forces” in wage determination. Unemployment had a strong downward impact on wages. There is evidence that reductions in working time added to wage pressure; yet, estimates of labor demand equations suggest that cuts in working time may have slightly increased employment as firms substituted workers for hours per worker.

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Notes

  1. See e.g. Brunner (1981) and Eichengreen and Hatton (1988) for contributions to research on the Great Depression and interwar labor markets. Dimsdale et al. (1989) present a study of the interwar labor market in the UK, and Hatton and Thomas (2010) offer a comparative perspective on US and UK interwar labor markets.

  2. Discussions and analyses of Swedish economic policies during the interwar period are contained in, for example, Bergström (1969), Jonung (1979, 1981), Montgomery (1938), Lundberg (1983/1994) and Östlind (1945). Fregert (1994) includes detailed studies of wage contracts and business cycles; see also Fregert (2000) and Fregert and Jonung (2004, 2008). Jonung and Wadensjö (1978, 1979) present estimates of Phillips curves that include interwar data. Hassler et al. (1994) provide a quantitative description of stylized Swedish business cycle facts using data from the 1860s and onwards.

  3. The empirical literature on these issues includes, among others, contributions from Bårdsen et al. (2010), Forslund (1994), Holmlund and Zetterberg (1991), Johansen (1996, 1999) and Nickell and Wadhwani (1990).

  4. An example of a relatively recent theoretical paper is Marimon and Zilibotti (2000). An empirical study of recent Swedish experiences of working time reductions is contained in Nordström Skans (2004).

  5. See Calmfors and Forslund (1991) and Forslund and Kolm (2004) for studies that use Swedish data from the post-World War II period. Darby (1976) and Kesselman and Savin (1978) discuss the New Deal experiences.

  6. With some abuse of language, we frequently refer to the period from the mid-1910s to the late 1930s as the “interwar” period.

  7. The data sources are described in the appendix. A major source is the historical national accounts reconstructed by Krantz and Schön (2007) and posted at http://www.ekh.lu.se/database/lu-madd/.

  8. Among the economists, Knut Wicksell took the most extreme position by arguing that a return to the prewar price level should be the goal of monetary policy. This would have required a drastic reduction in the price level considering that the consumer price had increased by 170 percent from 1914 to 1920.

  9. See Klovland (1998) for a comparative analysis of Scandinavian monetary policies and business cycles in the 1920s and 1930s.

  10. See Jonung (1979) for a detailed account of Swedish monetary policy in the 1930s. Bohlin (2010) includes a detailed discussion of Swedish exchange rate policies.

  11. Bergström (1969) includes an analysis of Swedish fiscal policy in the interwar period.

  12. See Kjellberg (1983, pp. 269–270) for data on union density and Fregert and Jonung (2008) for data on coverage rates.

  13. See Hansson (1942, p. 373) for data on SAF members. The number of workers in the industry was obtained from Statistics Sweden.

  14. See SOU 1936:32, Öhman (1970) or Axelsson et al. (1987) for descriptions and discussions of Swedish unemployment policies during the interwar period.

  15. We will use “relief works” as a generic term for public employment programs during the interwar period.

  16. The case for using public works in recessions was also argued by Bertil Ohlin (1934) in an important contribution to the theory of economic expansion.

  17. European labor unions had demanded a 48-h workweek for decades, and legislations in line with these demands were undertaken in many countries by the end of the 1910s.

  18. These events in the metal industry have been called the “great compensation conflict”; see Lindgren et al. (1948) for a detailed account of this conflict.

  19. The business sector is defined as including manufacturing, building and construction, transport and communication, and private services.

  20. The estimated equation for 1913–1939 is: Annual hours = constant + 38.6 × (standard hours) − 12.1 × (unemployment, %). The (absolute) t values on the two regressors are 10.5 and 4.8, respectively; adj. R-sq = 0.93, DW = 1.76.

  21. Bernanke and Powell (1986) report similar patterns for the interwar US labor market.

  22. See Prado (2010) for wage series that date back to 1860.

  23. The estimates of trend growth rates were derived from semilogarithmic regressions where the log of the variable of interest is explained by a linear trend.

  24. Wage changes in the construction industry—not included among the nine industries studied—were also highly correlated with wage changes in manufacturing, albeit slightly less so than the correlations set out in Table 1. Wages in construction declined even more than wages in manufacturing between 1921 and 1922.

  25. In a speech 1918, Knut Wicksell argued strongly against the idea that workers would be unwilling to accept wage cuts when prices were falling; cited by Lundberg (1983/1994, pp. 73–74).

  26. See Nerman (1939) for a detailed account of these events.

  27. The correlations are as follows: employment, tightness = 0.87; unemployment, tightness = −0.80; unemployment, employment = −0.71.

  28. Consider a standard model of Nash bargaining over wages where the union’s power in the bargain is captured by \( \beta ,\,\,\beta \in (0,1) \). One can derive a wage-setting rule at the sectoral level (sector i) of the form

    $$ w_{i} = \left( {\frac{\varepsilon - 1 + \beta }{\varepsilon - 1}} \right)\bar{w} $$

    where ε is the (absolute value) wage elasticity of labor demand and \( \bar{w} \) is the outside wage. The markup on the outside wage is constant if ε is constant, as under Cobb-Douglas technology and perfectly competitive output markets. In the general CES case with a fixed capital stock, we have \( \varepsilon = \sigma /s^{k} (w/p) \), where σ is the elasticity of substitution between labor and capital and s k is the share of capital in value added. It is straightforward to verify that the nominal wage depends positively on the output price if σ < 1. A model with imperfect competition in output markets and non-constant demand elasticities can deliver similar predictions; see for example Forslund et al. (2008).

  29. In their estimations of industry wage equations on Norwegian data, Bårdsen et al. (2010) ignore the outside wage, thus effectively setting λ = 1. This is arguably a restrictive and theoretically unappealing specification at odds with other studies of industry wages.

  30. The industries are the following: Mining and Metalwork; Stone and Glass; Wood; Paper and Printing; Foodstuff; Textiles and Clothing; Leather and Rubber; Chemical Industries; Electricity and Energy.

  31. Other studies of insider effects in wage determination include, among others, Nickell and Wadhwani (1990) using UK data and Johansen (1996, 1999) using Norwegian data. Nickell and Wadhwani report estimates of the insider weight around 0.1, whereas Johansen reports estimates around 0.2.

  32. The appendix is available in the Working Paper version of this article: http://www.ucls.nek.uu.se/publications/Working_papers_2012/.

  33. The Durbin-Watson statistic is inappropriate with a lagged endogenous variable as in Eq. (10). However, the LM test does not reject the null of no autocorrelation in this case; prob F(2,18) = 0.06.

  34. Hamermesh (1993) summarizes empirical studies of the demand for workers and hours as follows (p. 269): “The overwhelming bulk of evidence … suggests strongly that employers adjust their demand for hours more rapidly than their demand for workers. … It is reasonable to assume that the cost of hiring and training new workers increases more rapidly than that of increasing the hours of current employees. When demand drops, the fear of losing trained employees raises the costs of layoffs relative to those of cutting hours.”

  35. To obtain the impact on the unemployment rate (ur), note that the elasticity of the unemployment rate with respect to the level of employment can be written as \( du/dn = - (1 - ur)/ur \). Thus, we have \( du/dh^{s} = (du/dn) \times (dn/dh^{s} ) \) where \( dn/dh^{s} \) is given by (15) and \( du = d\log (ur) \).

  36. Estimation of the standard deviations of Swedish annual log changes in employment and hours per worker for the period 1987–2011 yields 0.022 for employment and 0.008 for hours per worker.

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Acknowledgments

I thank Klas Fregert, Tim Hatton and the referee for useful comments. I also thank Laura Hartman for providing excellent research assistance during an early phase of the project.

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  1. Department of Economics and UCLS, Uppsala University, Uppsala, Sweden

    Bertil Holmlund

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Appendix: The Data

Appendix: The Data

Consumer prices:

Edvinsson and Söderberg (2010) (http://www.riksbank.se/upload/Dokument_riksbank/Kat_foa/2010/8.pdf).

Producer prices for nine industries:

Mining and Metalwork; Stone and Glass; Wood; Paper and Printing; Foodstuff; Textiles and Clothing; Leather and Rubber; Chemical Industries; Electricity and Energy. Department of Economic History, Lund University: LU–MADD (Lund University Macroeconomic and Demographic Database, http://www.ekh.lu.se/database/lu-madd/). The price indexes were originally published in Ljungberg (1990).

Value added price index for the business sector:

The series was obtained as the ratio between value added in current prices and value added in constant prices. Four sectors are aggregated: manufacturing, building and construction, transport and communication, and private services. Source: LU–MADD (see above).

Yearly wages for the business sector:

Historisk statistik för Sverige—statistiska översiktstabeller (Historical Statistics for Sweden), Table 128. Refer to production workers (arbetare). Statistics Sweden, 1960.

Wage share in the business sector:

(Yearly wages × employees)/(value added in current prices). Employees in the business sector, see below; value added from LU–MADD, see above.

Hourly wages for the business sector:

Lönenivåns förändringar för arbetare inom industri och hantverk, handel och transportväsen, allmän tjänst m m. Lönestatistisk årsbok för Sverige, various issues. Socialstyrelsen.

Daily wages for nine manufacturing industries:

Data for 1923–1925 were imputed by using information on the evolution of hourly wages for those years. Lönestatistisk årsbok för Sverige, various issues. Socialstyrelsen.

Hours per worker:

Yearly wages divided by hourly wages; see above.

Total number of hours in the business sector:

Hours per worker multiplied by the number of workers employed in the business sector (the total of employment in manufacturing, building and construction, transport and communication and private services). Employment data from LU–MADD (see above).

Standard workweek:

The length of the workweek according to law and collective agreements. S Tegle (1983), Den ordinarie veckarbetstiden i Sverige 1860–1980. Meddelande 1983: 86 Department of Economics, Lund University. The standard workweek is set to 48 from 1920 and onwards.

Sales per worker for nine industries:

Industry sales in current prices (saluvärde i kronor) divided by the total number of workers in the industry. Industristatistik, various issues, Statistics Sweden.

Unemployment:

Unemployment among union members as a percentage of the number of members. Monthly data obtained from various issues of Sociala meddelanden published by Socialstyrelsen.

Relief jobs:

Participants in public employment programs run by central or local governments (statliga reservarbeten, statskommunala reservarbeten, kommunala reservarbeten). Information on central government relief jobs is available from 1918; information involving local governments from 1922. To obtain a measure of the total number of relief workers during 1918–1921, the number of central government relief workers was multiplied by two; this is based on the average ratio between total relief and central government relief works over the period 1924–1928. Information on relief works prior to 1918 is not available, but the magnitude is almost certainly negligible. The (partly imputed) average number of relief workers in 1918 amounted to 1800 persons and is likely to have been even lower during the previous war years. The number was set to 1,000 for 1913–1917. Sources: Svensk arbetslöshetspolitik åren 1914–1935 (SOU 1936:32); Statistisk årsbok 1941.

Total number of employees:

Historia.se—portalen för historisk statistik (Rodney Edvinsson) (http://www.historia.se/).

Total number of employees in the business sector:

The ratio between the number of employees in the business sector and total employment in the sector (from http://www.historia.se/) multiplied by total employment in the business sector according to LU–MADD.

Job placements, job vacancies, job applications:

The annual flows of job placements, vacancies and job applications (number of persons applying for work) at the public employment service. Source: Öhman (1970), Svensk arbetsmarknadspolitik 1900–1947 (p. 187).

Wages and prices in the UK:

Scholliers and Zamagni (1995 (appendix table A.24).

GDP Sweden:

LU–MADD (see above).

GDP in Western Europe:

Historical statistics for the world economy: 1–2003 AD (Angus Maddison), http://www.ggdc.net/Maddison/Historical_Statistics/horizontal-file_03-2007.xls (11 Western European countries excluding Sweden).

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Holmlund, B. Wage and employment determination in volatile times: Sweden 1913–1939. Cliometrica 7, 131–159 (2013). https://doi.org/10.1007/s11698-012-0084-9

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