The Intensification of the Great Depression

UCLA economist Lee E. Ohanian writes in a new paper:

I develop a theory of labor market failure for the Great Depression based on Hoover's industrial labor program that provided industry with protection from unions in return for keeping nominal wages fixed. I find that the theory accounts for much of the depth of the Depression and for the asymmetry of the depression across sectors. The theory also can reconcile why deflation and low levels of nominal spending apparently had such large real effects during the 1930s, but not during other periods of significant deflation.

The downturn in the economy during the 1930's was started as a result of the boom-bust money manipulations of the Federal Reserve. However, Ohanian is spot on in understanding that the downturn was intensified and extended as a result of such policies as the attempt to prop up wages during the downturn.