Unemployment in Weimar Germany January 2004 N.H. Dimsdale 1 , N. Horsewood2 and A. van Riel3 Abstract This paper contributes to the debate on the causes of unemployment in interwar Germany. It applies the Layard-Nickell model of the labour market to interwar Germany. The basic model is extended to capture the effects of the tariff wage under the Weimar Republic and the Nazis. The results of the estimation suggest that demand shocks combined with nominal inertia in the labour market were important in explaining unemployment. In addition pressures on the real wage due the political processes of wage determination were a major influence on unemployment. Negative demand shocks appear to have been domestic in origin and to have started before the onset of the World Depression. Both negative developments on the demand side of the economy and pressures coming from the supply side raised unemployment in the slump. In the recovery the wage policies of the Nazis and the revival of demand both contributed to the fall in unemployment. The mutual reinforcement of these factors may help to explain the severity of the interwar cycle in Germany. It also serves to emphasise the close connection between political and economic processes in this important episode in macroeconomic history. JEL classification: N14, E24, E32 Keywords: Great Depression, Germany, real wages, unemployment Acknowledgements: We acknowledge the valuable comments of Peter Temin on an earlier draft. 1 2 3 The Queen’s College, Oxford Department of Economics, University of Birmingham Social Policy, Netherlands Economic Institute, Rotterdam 1 1. Introduction Germany’s experience of the Great Depression was exceptionally severe. Between the summer of 1929 and early 1929, German unemployment rose from just under 1.3 million to over 6 million, corresponding to a rise in the unemployment rate from 4.5 per cent of the labour force to 24 per cent. Following a seasonal upswing in labour demand that reduced the level to 5.1 million in September 1932, unemployment again exceeded 6 million at the start of 1933. Over the same period GDP, according to the latest estimates, declined at an annual rate of 8.3 per cent. Real weekly wages, having continued to rise up to early 1931, started a decline of 2.5 per cent per annum that lasted until mid 1935.In short the German slump was the most dramatic among major European economies. As the economic crisis unfolded, the first German Republic suffered the decline of its democratic institutions. As the country was ruled by successive minority cabinets and presidential decrees, the share of the vote at successive elections shifted in favour of the Communist and Nazi opposition parties, rising from 13 per cent under the last parliamentary coalition government in May 1928 to half of all valid votes cast in the last free elections of November 1932. On January 30 1933 the Reichspräsident, after an earlier refusal in 1932, appointed Adolf Hitler as the chancellor of a Nazi dominated coalition, setting the nation upon a path of totalitarian rule, warfare and racial persecution. Thus the dismal record of the German economy in the interwar period holds a pivotal position in the analysis of the political demise of the Weimar Republic. Ranking among the world’s most dynamic economies in the years before World War I, Germany experienced successively inflation and severe deflation during the 1920s and the early 1930s. Both eve nts undermined the already questionable legitimacy of what has 2 been called the improvised Republic and created the conditions for the emergence of political radicalization. Successive authors have differed in their assessment of the relevant mechanisms at work and on the extent to which the monetary and political events of the 1920s made Germany vulnerable to the impact of the Great Depression. Early studies of the Weimar decline did not emphasize the interaction of political and economic processes. A passing reference was made to the effects of the economic crisis in what was seen as a process of decline in democratic rule. Starting with Bracher (1964), this literature was mainly concerned with the constitutional arrangements of the post World War I federal state and the vulnerability of its institutions to the erosion of parliamentary rule. The instability of successive coalitions was seen as a manifestation of an ill adapted parliamentary system, threatened by economic turbulence and deep social divisions. The critical role of economic policy during the Depression was emphasized during the period when Keynesian views were dominant. The deflationary policies of Brüning were attacked by those arguing the case for fiscal expansion. The principal line of defenc e against this critique was that policy makers chose to subordinate fiscal policy to reparations policy with the aim of lifting the constraints on borrowing. There was also a natural prudence in German economic policy during the Great Depression in the light of the inflationary experiences of the early 1920s. Both these justifications for Weimar economic policy were put forward by Brüning in his memoirs, Brüning (1970). The postwar consensus blamed the policy choices of the Brüning cabinet for the disastrous economic and political outcome of the Weimar regime. As Balderston (1993) states : ‘’received opinion up to 1979 viewed the slump in Germany as the result of a combination of 3 monetary instability and policy inaptness’’. This interpretation was challenged by the Munich historian Knut Borchardt (1979) (1991), who related the structural weakness in Germany’s economic performance in the 1920s, based of Hoffman’s national income data, to the political difficulties of the Weimar Republic. He argued that there was a structural deficiency in the German economy, which was present before the onset of the slump and was related to weak productivity performance, increasing money wages and under investment. During the post inflation period wage increases based on institutionalized arbitration were claimed to have exceeded the growth of labour productivity, squeezing profits and discouraging investment. Monetary restraint, rooted in reparations policy under the Young Plan with its reliance upon the gold standard, severely restricted the freedom of action of Weimar governments as did the limited creditworthiness of the German state. According to this view, Brüning had no room for manoeuvre leaving no practical alternative to deflation. Balderston (2002) has usefully distinguished between the Borchardt I hypothesis, which relates to the effects of labour market pressures on the Weimar economy, and the Borchardt II hypothesis, which questions whether there were any realistic alternatives to the policy of deflation in 1931. In this paper we are primarily interested in the first hypothesis, taking as our starting point the following concise statement of the main issue: ‘’ Neither economic theory nor empirical evidence appears to me to have delivered clear criteria for answering the question as to whether continuing unemployment was a case of weakness in demand or whether this was a case of classical real wage unemployment, or perhaps both factors played a part’’. Borchardt (1991:175). Our aim in this paper is to seek to resolve this issue, using the model of the aggregate labour market developed in detail by Layard, Nickell and Jackman (1991). It was proposed 4 initially to explain unemployment in postwar Britain in Layard and Nickell (1986) and this aim was extended to a full analysis of the working of postwar labour markets in OECD countries in Layard, Nickell and Jackman (1991). The model was used to explain British interwar experience in Dimsdale, Nickell and Horsewood (1989) and more recently has been applied to the Australian labour market in the interwar period in Dimsdale and Horsewood (2003). The model seeks to distinguish between the impact of demand- and supply-side factors on unemployment and so is well suited to responding to the issue which Borchardt has raised. We are able to undertake this empirical work because of substantial improvements to the quarterly data for the interwar German economy, which are fully described in the Appendix. We are chiefly interested in the German slump but, since the sample covers the period 1926 -1936, we can also examine the factors explaining the initial stages of the recovery under the Nazis. There has been extensive discussion among economic historians about the causes of unemployment in Germany under the Weimar Republic, which has been recently summarized by Balderston (2002). Specifically we hope to be able to explain the contribution of supply -side factors to raising real wages and unemployment in the slump as compared with the effects of adverse demand shocks. During the recovery, which took place under the Nazis, we aim to distinguish between the impact of labour market policies and the effects of reflation. The paper is divided into eight sections. Section 2 reviews the ongoing discussion on the causes of the German slump. Section 3 outlines the Layard-Nickell model as adapted to model the labour market institutions set up under the Weimar Republic. Section 4 reviews the course of the main macroeconomic time series included in the model. Section 5 reports the empirical results, followed by an analysis of the causes of unemployment in Section 6. Section 7 provides a diagrammatic representation of the model and its implications for the historical debate, followed by a brief conclusion. 5 2 . Unemployment and the Borchardt Debate. There has been a continuing debate among economic historians over the causes of German unemployment. Some writers have placed heavy emphasis on demand factors in generating the boom of the late 1920s and the depression of the early 1930s, as well as economic recovery under the Nazis. Contrary to this view, Borchardt has argued that supply-side factors, working through the real wage, contributed to the rise in unemployment under the Weimar Republic, Borchardt (1979), (1991). In fact, the predominance of demand shocks in pushing the German economy into recession in 1929-32 is implicit in the conventional view that the German downturn arose from the interruption of capital flows from the United States. According to this school of thought the abrupt ending of external finance forced a reduction in domestic spending, which pushed the economy into a slump, as argued by Schmidt (1924) and more recently by Sommariva and Tullio (1987). Even the timing of the downturn remains controversial. In an early paper Temin (1971) claimed that the level of domestic spending was falling well before the adverse shock to capital inflows. His view has been contested by Falkus (1975) and Balderston (1977). However, Temin’s argument has received support from Ritschl (1999), who provides evidence for a peaking of domestic demand in 1927-28. Both approaches emphasise demand factors, but differ over the role of internal and external forces. Eichengreen (1992) adopts a compromise position on this issue. Since his thesis relates to the role of the gold standard in transmitting the U.S. recession internationally, he cannot deny the role of external forces acting on the German economy, while recognizing that other forces may also have been at work. Among German economic historians, there has been a vigorous debate over the contribution which Keynesian policies might have made to counteracting the depression. This 6 controversy was re-ignited by the Borchardt II hypothesis on the lack of feasibility of countercyclical measures, which stimulated the discussion in von Kruedener (1990). Holtfrerich put the case for both public expenditure and devaluation as ways of expanding demand. Borchardt argued in response that such measures were not available to policy makers because of political constraints. However, this debate accepts implicitly the importance of deficient demand, even if remedial measures were ruled out by political considerations. The case for the importance of supply-side factors was implicit in the Borchardt I hypothesis. Upward pressure on wages was encouraged by the system of industrial relations introduced following the revolution of 1918. Under this system wages were set by the Zentralarbeitgemeinschaft on which both trade unions and employers were represented. Borchardt (1991:181-3) notes that the new procedures did not work smoothly, particularly after the ending of the post World War I inflation and the stabilization of the currency in 1923/4, when old conflicts between trade unions and employers re-emerged. The breakdown of industrial relations led to increasing reliance upon compulsory arbitration by the state to settle industrial disputes. This encouraged both sides of industry to advance their interests by putting pressure on the government. He suggests that these forces played a major role in weakening the Weimar regime through undermining its legitimacy. We are less concerned with the broader political issues and focus on the economic aspects of his thesis, in particular the claim that the resulting level of real wages aggravated unemployment under the Weimar regime. Borchardt’s views have not gone unchallenged. Holfrerich has questioned his productivity calculations, but his results have been supported by Ritschl’s more recent work. Weisbrod has argued that the emphasis on the role of compulsory arbitration may be overstated, as noted by von Kruedener (1990). Nevertheless Borchardt has made a powerful case for the importance of the nexus between real 7 wages and wage determining processes. He has restated a case made forcefully by Schacht (1931) in criticizing the damaging effects of labour relations under Weimar. He is also supported by other economic historians who have emphasized the importance of the labour market, such as Balderston (1993) and James (1986). The importance of the contract or tariff wage in the determination of weekly wages is crucial for Borchardt’s argument. Our aim in this paper is to modify the Layard-Nickell model so that it can be used to examine the impact of the tariff wage on real wages and unemployment under Weimar. In this way an important element of Borchardt’s supply side hypothesis can be tested. It is also necessary to examine whether the real tariff wage was determined by political or economic factors or some combination of the two. Borchardt emphasizes the role of political influences, while Balderston suggests that both economic and political elements played a part in determining the tariff wage. Broadberry and Ritschl (1995) have provided some empirical evidence showing that the demand for labour in interwar Germany was responsive to the real wage, as claimed by Borchardt. We shall be able to test this argument within a broader framework, which includes demand-side shocks and the dynamics of wage adjustment. An advantage of the model is that it can be extended to model the working of country specific labour market institutions as shown for Australia in Dimsdale and Horsewood (2003). This flexibility is essential in modeling the German labour market. Even the basic version of the model, as applied to interwar Britain by Dimsdale et al (1989), can be interpreted as modeling the outcome of a bargaining process or alternatively the working of a competitive labour market with asymmetric information. 8 Table 1: The Basic Model of the Labour Market Employment Equation 1. ln CEMP = α 0 + α1lnK + α2 ln(W/P) + α3 ln(Pim/P) + σ + +/+ 1a. σ = α4 ∆lnGOV + α5 ∆lnTOBQ + α6 (CAPIM/Y) + + + Wage Equation 2. ln(W/P) = β0 + β1 ln(K/L) + β2 ln(Pim/P) + β3lnU + Z + β4 ln(P e/P) + +/- 2a. Z = β5 lnRTW + β6 MM + β7 RR + + + Tariff Wage Equation ∆lnRTW = γ0 + γ1 ∆ln(Pim/P) + γ2NDUM + Price Mark-up Equation 3. 4. ln(P/W) = δ0 + δ1 PROD + δ2 ln(Pim/P) + δ3 ln(We/W) + δ4 σ + + Variables CEMP K W P Pim GOV TOBQ CAPIM/Y PROD U RTW MM RR NDUM Civil employment Capital stock (excluding housing) Money wage (weekly) Total final expenditure deflator Price of imports Real government expenditure on goods & services Real share price: stock market index deflated by GDP deflator Net capital inflow as a ratio to nominal GDP Labour productivity Unemployment (%) Real tariff wage (nominal tariff wage deflated by the consumer price index) Mismatch Replacement ratio Nazi dummy D = 1 1933Q2-1936Q4 D = 0 1926Q1-1933Q1 9 3. The Layard-Nickell Model of the Labour Market The model of the labour market is derived from Layard and Nickell (1986) and Layard, Nickell and Jackman (1991). It consists of an employment equation, an equation for real wages and a price mark-up equation. The determination of the real wage and unemployment is the outcome of an interaction between the actions of wage setters, including trade unions and wage determining bodies, and the pricing policies of firms. In the employment equation, (Equation 1), which, in common with the other equations of the model, is in log-linear form, employment is positively related to the capital stock and negatively to the real wage. The real wage is defined as the product wage which is relevant to the employment decisions of firms. The money wage is therefore deflated by the price of final output or TFE (total final expenditure) deflator. Employment also depends on the real price of imports that is the import price index deflated by the TFE deflator. The sign of the coefficient depends on whether imports are complementary or competitive with domestic output and employment. Imports of raw materials are likely to be complementary so that a rise in real import prices reduces employment. By contrast, imports of finished goods are likely to compete with domestic production so that the effect of a rise in real import prices on employment will be positive. The sign of the coefficient on real import prices is therefore ambiguous, depending on the relative strength of these two factors. Employment is affected by demand shocks, as well as the fundamental determinants, which have been discussed so far. These shocks are designated s and are shown in Equation 1 a. A wide range of variables may be tested for inclusion as demand-side shocks. The variables on which we place most emphasis are the change in the real price of shares, defined as the share index deflated by the GDP deflator, the change in real government spending on goods and 10 services, and the ratio of capital inflow to nominal GDP. The first variable picks up the impact of the shifts in domestic business confidence. It uses the hypothesis of Ritschl (1999), who emphasises the importance of real share prices in the German recovery in the 1920s and their subsequent relapse from 1928. The change in real government expenditure allows the expansionary fiscal programme introduced under the Nazi regime to affect employment. The ratio of net capital inflows to GDP is a measure of the impact of capital inflows on domestic activity and is unlogged as capital flows can be negative. The importance of capital flows has been emphasised by Ritschl (1998), (1999) as well as by Balderston (1993). The demand variables enter in difference form because the structure of the model is basically neoclassical. The demand variables are grouped together as a single variable σ, where the weights attached to the individual components are estimated in the employment equation. In the wage equation, Equation (2), the real wage, defined as the money wage deflated by the price of final output, is determined by both economic fundamentals, such as labour productivity and the unemployment, and the real tariff wage. The real wage is positively related to productivity as workers are offered higher real wages as labour productivity increases. Unemployment has a negative effect on the real wage, which reflects two distinct processes. A higher level of employment strengthens the bargaining position of the labour force resulting in a higher real wage. In addition the wage setting policies of firms lead them to raise real wages to recruit more workers. This occurs on account of adverse selection in the labour market even in the absence of trade unions. Both collective bargaining and asymmetric information in the labour market can give rise to a positive relationship between employment and the real wage. Layard, Nickell and Jackman (1991: Chap 3). The real wage is also affected by mismatch and the replacement ratio. Mismatch occurs when unemployment is unequally distributed across local 11 labour markets. There will be a higher degree of tightness in the aggregate labour market, when mismatch is greater at a given level of unemployment. The higher the replacement ratio, the greater is the incentive for workers to engage in search activity in labour markets. The real wage is therefore positively related to the replacement ratio in Equation (2). The real price of imports has a positive effect on the real wage as workers seek compensation for a rise in import prices by seeking a larger share of domestic output. An unexpected rise in prices reduces the real wage as workers are caught out by the price rise, while an unexpected fall in prices has the opposite effect. If money wages are sticky, there is more scope for unforeseen price changes to affect the real wage. This effect is designated nominal inertia by Layard, Nickell and Jackman (1991: 1516 ). There is a large literature which emphasises the importance of the tariff wage in influencing labour market conditions under the Weimar Republic, which is reviewed by Balderston (1993: 18-48) and noted by James (1986: 204-213). We have taken account of this by including the real tariff wage in the wage equation, where the nominal tariff wage is deflated by the consumer price index. We have then attempted to explain the determinants of the change in the tariff wage, which reflects a complex process of wage determination including compulsory state arbitration, as discussed in the literature. The real tariff wage, which enters into Equation (2), is explained by the tariff wage equation, Equation (3). Since this equation is in first differences a positive constant measures the upward pressure on the real wage due to the wage determining processes under the Weimar Republic. Under the Nazis the role of the tariff wage system was substantially altered, as noted by James (1986: 367-71) and Bry (1960). It came to be used as a device to check the rise in the real wage by pegging the nominal tariff wage. This change of policy is modelled in our equation by a dummy variable for the Nazi era, which has an 12 expected negative coefficient. The tariff wage equation also includes the change in the real price of imports prices, while the role of other economic variables, such as unemployment and mismatch, is also examined. In the price equation, Equation (4), the price mark-up is negatively related to productivity. This is part of the mechanism by which increased productivity is translated into higher real wages as wages rise more than prices. The mark-up is positively related to real import prices, since higher real import prices raise the gross margins of firms. Unexpected increases in money wages reduce the mark-up until firms have had time to adjust their pricing policies. There is scope for nominal inertia due to price stickiness to affect margins in the price equation, just as unexpected price changes impact on the real wage in the wage equation. Finally demand pressure, s ,using weights estimated from the employment equation, is included in the price equation, since positive demand shocks may encourage firms to increase their margins. Previous studies provide conflicting evidence on the role of s in the price equation. Charts Chart 1: Percentage Unemployment Chart 2: Civil Employment 20000 .2 19000 18000 .15 17000 16000 .1 15000 .05 14000 13000 1925 1926 1927 1928 1929 1930 1931 1932 1933 1934 1935 1936 1937 1925 13 1926 1927 1928 1929 1930 1931 1932 1933 1934 1935 1936 1937 Chart 3: Real Product Wage (W/P) Chart 4 Real Tariff Wage ( TW/CPI) 115 .46 .45 110 .44 105 .43 .42 100 .41 95 .4 .39 90 .38 85 .37 1925 1926 1927 1928 1929 1930 1931 1932 1933 1934 1935 1936 1937 Chart 5: Replacement Ratio 1925 1926 1927 1928 1929 1930 1931 1932 1933 1934 1935 1936 1937 Chart 6: Real Price of Imports (IMPP/P) 3.8 1.1 3.75 1 3.7 3.65 .9 3.6 .8 3.55 3.5 .7 3.45 .6 3.4 1925 1925 1926 1927 1928 1929 1930 1931 1932 1933 1934 1935 1936 1937 14 1926 1927 1928 1929 1930 1931 1932 1933 1934 1935 1936 1937 Chart 7: Real Price of Shares (Share Price/Price GDP) Chart 8: Capital Imports/GDP 15 1.3 1.2 10 1.1 5 1 .9 0 .8 -5 .7 .6 -10 .5 1925 1926 1927 Chart 9 1928 1929 1930 1931 1932 1933 1934 1935 1936 1937 Real Government Expenditure on Goods and Services 1925 1926 1927 1928 1929 1930 1931 1932 1933 1934 1935 1936 1937 Chart 10: Annual growth rate of the real tariff rate 12.5 3000 GOV 10 2500 7.5 5 2000 2.5 0 1500 -2.5 1000 -5 1925 1926 1927 1928 1929 1930 1931 1932 1933 1934 1935 1936 1937 1925 1926 1927 15 1928 1929 1930 1931 1932 1933 1934 1935 1936 1937 4. The Main Variables in the Model Before estimating the model we review the course of some of the principal variables, which are included in it. The quarterly data set covers the sample first quarter1925 to the fourth quarter of 1936. The labour market series have been computed by A.van Riel and details relating to their construction are set out in the Appendix. National income data have been drawn from the unpublished work of Ritschl and we are most grateful to him for permitting us to use them. The initial set of variables relates to the labour market and the second set to the demand side variables, which could be included in the employment and price equations. Unemployment shown in Chart 1 follows a gradually rising course until 1930, varying within a range of 5-10 per cent of the labour force. It then rises steeply, peaking at 25 per cent in 1932. From early in1932 there is a sustained decline, which reduces unemployment to the about the same level as at the beginning of the sample period. Civil employment, which is shown in Chart 2, follows a complementary course to the unemployment rate reaching a peak in 1928-29. The precise timing of the upper turning point of the Weimar boom is uncertain, since the various indicators peak at different times, as Borchardt (1991) has noted. The severe decline in employment from 1929 to 1932 shows unambiguously the effect of the Great Depression, while the subsequent recovery shows up strongly in the employment data from 1932 to 1936. The model lays emphasis on the real product wage, defined as weekly earnings divided by the deflator for final expenditure. This series is plotted in Chart 3, which shows that the real wage increased throughout the boom of the late 1920s and continued to rise in the early stages of the slump. The real wage continued to grow in the downturn because the money wage was declining more slowly than the price of final output. From 1931 to 1934 the real wage fell as money wages were reduced more rapidly than prices, but after 1934 the real wage staged a mild recovery. Chart 4 shows the real tariff or 16 contract wage, defined as the tariff wage deflated by the consumer price index. The series increased sharply in the boom of the late 1920s, leveling off in 1930-31.There was a steep decline early in 1932, followed by a more gradual decline under the Nazi regime, when the real tariff wage was reduced by the deliberate policy of pegging the nominal tariff wage at a time of gently rising prices. The replacement ratio (the ratio of unemployment benefits to earnings) is plotted in Chart 5. The series rises strongly to 1927 and then falls steadily as benefits made available under the reformed unemployment scheme were progressively reduced as more recipients became dependent on ‘ crisis relief ’. Balderston(1993: 241-2). The real price of imports, defined as the price of imports deflated by the price of final output, is shown in Chart 6. It followed a downward trend, which gathered in pace during the depression of 1929-1932. This can be explained by the greater decline in the price of food and raw materials of which imports were largely composed compared to the price of final output. We now turn to the demand-side variables which are include d in s. These are the real price of shares, net capital inflow and real government expenditure on goods and services, The real price of shares or real Tobin q, defined as the share index divided by the GDP deflator , is shown in Chart 7. The real share prices reached a peak in mid 1927, followed by a sharp decline to a low point in late 1931. There was then a sustained recovery to the end of 1936. The inflow of foreign capital, measured as a ratio to nominal GDP, reached a peak in 1928, before falling steeply to 1932, when there was a net outflow of capital, as shown in Chart 8. From 1932 until the end of the sample the balance was approximately zero. The last of the demand-side variables is real government expenditure on goods and services plotted in Chart 9. The series showed no clear trend before 1933, but followed a strong upward trend under the influence of Nazi policies from 1934 onwards. 17 Chart 10 shows the rate of change of the real tariff wage, which was positive under the Weimar Republic, prior to the severe measures taken by the Brüning government in late 1931. The decline in the real tariff wage continued under the Nazi policy of pegging the nominal value of the tariff wage. However some increase in market wages occurred in the period 1934 -6 on account of efficiency wage considerations. 5: Empirical Results (a) Employment Equation The results of estimating the employment equation Equation(5) are shown in Table 2. The equation is in equilibrium correction form and shows a short- run response of employment to the real wage with an elasticity of – 0.307, which rises to -0.747 in the long run. This elasticity is comparable with that reported by Broadberry and Ritschl (1995). The real price of imports enters strongly in first differences of a moving average term. An increase in the real price of imports has a positive effect on employment, as imports are on balance competitive with domestic output. There are also some dynamic effects in the real wage which are strongly significant. The variables which model demand shocks in the equation are the lagged annual change in the real price of shares (DTOBQ), the ratio of capital imports to GDP and lagged changes in real government spending on goods and services. Ritschl (1999) argues that real share prices were an indicator of business confidence and had a powerful impact on investment. Since the series peaks in 1927, the implication is that the German downturn began well before the Wall St crash. 18 Table 2 Employment Equation Sample 1926 Q3 - 1936 Q4 Dependent variable Estimation Equation (5) ∆4 lnNt OLS [7] Constant ∆3 lnNt-1 Coefficient t-statistic 1.5012 9.021 0.36082 4.294 ln(N/K)t-4 -0.41061 -11.124 ln(W/P)t-2 ∆4 ∆3 ln(W/P)t -0.30664 -4.324 -0.51082 -7.921 ∆4 lnTOBQt-4 0.0488 4.394 MA3(CAPIMYt ) 0.0007 4.398 MA3(∆4 lnRIMPt ) 0.17172 9.075 ∆lnGOVt-4 Q1 Q2 Q3 0.035597 -0.0257 0.0704 0.0378 2.845 -4.786 6.185 6.360 R2 σ DW AR1-4 0.988768 0.0116 2.39 1.927 Definition of variables N Civil employment K Capital stock W Weekly wages P Final expenditure deflator TOBQ Real share price = share index divided by GDP deflator CAPIMY Ratio of capital imports to GDP RIMP Real import prices = price of imports divided by final expenditure deflator GOV Real government spending RM1 Real narrow money = nominal money supply divided by GDP deflator MAi(X) i-quarter moving average of X 19 Table 3 Wage Equation Equation ( 6 ) [39] Dependent variable ∆4 ln(W/P)t Sample 1927Q1 to 1936Q4 Constant ln(W/P)t-4 ln(TW/Pcpi) t-4 lnPROD D33Q1 lnRRt-4 ∆∆4 lnRPIMP t ∆4 ln(TW/Pcpi)t ∆2 lnUt-2 lnUt-4 ∆4 lnPt-4 Q1 Q2 Q3 Coefficient -1.994 -0.437 0.328 0.095 0.036 0.059 0.126 0.368 -0.021 -0.046 -0.210 0.003 -0.006 0.002 R2 SE DW AR(1-3) 0.951 0.0079 2.14 1.316 t-stat -3.41 -3.61 2.74 7.73 3.73 2.22 1.57 4.17 -2.48 -3.63 -3.27 0.69 -1.62 0.43 Additional Variables PROD TW/CPI U RR 4 quarter movin g average of hourly productivity Tariff wage deflated by consumer price index Percentage unemployment Replacement ratio = unemployment benefits divided by earnings 20 Table 4 Tariff Wage Equation Sample 1926 Q1 - 1936 Q4 Dependent variable Constant NDUM DV33q1 ∆2 lnRPIMP Q1 Q2 Q3 R2 σ DW ln ?(TW/CPI)t Equation( 7) [2] Equation( 8) Coefficient t-statistic Coefficient t-statistic 0.0074 2.060 -0.0120 -3.423 -0.0094 -2.71 -0.0500 -4.227 -0.0473 -3.86 -0.3435 0.0121 0.0071 -0.0043 -4.364 0.249 1.474 -0.876 0.6098 0.0111 2.65 -0.3277 0.0058 0.0146 0.0027 0.571 0.0115 2.55 Table 5: Price Equation Sample 1927 Q1 - 1936 Q4 Dependent Variable ∆? 4 ln(P/W)t Equation (9) [ 8] Coefficient t-stat Constant 0.068 2.62 ∆ln(P/W) t-4 -0.388 -3.89 ln(P/W)t-4 -0.085 -2.75 lnPROD -0.015 -1.75 -0.678 -7.58 ∆∆4 lnWt 0.114 1.63 ∆∆4 lnWt-2 3.08 ∆2∆3 lnRPIMP t-1 0.113 5.95 ∆2∆3 lnRPIMP t-3 0.221 Q1 0.003 0.77 Q2 0.002 0.50 Q3 -0.002 -0.68 R2 SE DW AR(1-3) 0.841 0.0077 1.87 0.252 21 -3.97 1.41 3.74 0.69 [ 58] Ritschl (1998) and Balderston (1993) have claimed that capital imports made a major contribution to the Weimar boom. The estimated equation points to the importance of both real share prices and capital inflows in explaining employment. It also finds a role for the change in real government spending, which contributes to raising the demand for labor after 1932. Government spending follows an erratic course with large quarterly variations. The high variance of this variable could be reducing its significance in the employment equation. Our estimates suggest that government expenditure had a positive impact on employment and was not offset through crowding out effects, as claimed by both Borchardt (1990) and Balderston (1993). To conclude, the employment equation yields well determined and plausible short and long-run elasticities for the real wage and confirms the significance of three sources of demand shocks. (b) Wage Equation The results of estimating the wage equation are shown in Table 3. Equation (6) is in equilibrium correction form. The real wage, defined as weekly earnings deflated by the price of final output, is positively related to productivity and the replacement ratio. Productivity is measured hourly rather than quarterly to reduce cyclical effects. The real wage is negatively related to unemployment as might be expected. In additional the real wage was significantly affected by nominal inertia, represented by the annual rate of price inflation.. This implies that that an increase in prices had a negative impact on the real wage as money wages responded with a lag to price changes. Similarly unexpected price declines tended to raise the real wage. This nominal inertia effect indicates a high degree of stickiness in money wages relative to the size of the coefficient. Stickiness of money wages has been noted by Bry (1960:158) and could have 22 been reinforced by the wage determining arrangements under both the Weimar and Nazi regimes. Nominal inertia was also found to be important for interwar Britain by Dimsdale et al (1989), where wages were chiefly determined by collective bargaining. The real tariff wage is included in the wage equation to model the wage determining arrangements in interwar Germany. The importance of the tariff wage has been emphasised by writers, such as Balderston (1993), James (1986) and Borchardt (1991).The nominal tariff wage is deflated by the consumer price index, since the wage determining arrangements may be more focused on the real consumption wage than on the real product wage. The long-run coefficient of the real tariff wage in the wage equation is 0.650, indicating a powerful effect on real weekly earnings. This is not surprising in view of the high proportion of the labour force, which was subject to tariff wage agreements, as noted by Schacht (1931). In addition wages were influenced by more market related factors, such as the unemployment rate, productivity and the replacement ratio. These variables help to explain the gap between actual earnings and the minimum wages set by official bargaining procedures, which has been noted by James (1986: 205). The wage equation serves to explain the ‘wage drift’, which James discusses. Finally there are several variables which enter the equation in dynamic form, such as the acceleration of real import prices and the change in the real tariff wage, while a dummy variable enters the equation for one quarter for data reasons. (c) Tariff Wage Equation Because of the need to include the real tariff wage in the wage equation, it is necessary to estimate an equation explaining this additional variable, which is not included in the basic Layard–Nickell model. We focus on explaining the change in the real tarif f wage and the results 23 are shown in Table 4. Equation (7), which is our preferred equation, shows that the growth in the real tariff wage was negatively related to the second difference of real import prices. The negative sign indicates that the nominal tariff wage was not adjusted rapidly enough to compensate wage earners for changes in the real price of imports. The remaining variables in the equation are measures of the effects of wage determining procedures, which were political in character. The positive constant indicates that there was upward pressure on the real tariff wage of 0.74 per cent per quarter under the Weimar government. Under the Nazis there was downward pressure on the real tariff wage of 0.46 per cent per quarter, which is calculated by adding the constant to the coefficient of the Nazi dummy. These results accord with the accounts of the workings of the labour market under the Weimar Republic, which emphasise the tendency for the outcome of wage determining processes to favour organized labour, James (1986) and Balderston (1993). It provides an explanation for Chart 10, which plots the quarterly rate of change of the real tariff wage. During the Weimar period there was upward pressure on the real tariff wage for reasons, which we have noted. By contrast under the Nazi regime the tariff wage was used as an instrument to keep down the real wage as shown in Chart 10. We also find a strongly significant dummy variable for first quarter 1932, which has a large negative coefficient. This ma y be interpreted as the consequence of the severe measures taken by the Brüning government to curb real wages in the depression under the Emergency Law of December 1931. The outcome of estimating the real tariff wage equation is to produce estimates of the impact of political variables, which generally accord with the accounts of economic historians. How important these measures were in affecting unemployment will be explored in our later analysis. It is notable that with the exception of import prices, economic variables, such as productivity growth and unemployment, did not affect the change in the tariff 24 wage, which was apparently governed by non-economic factors. This result supports Borchardt’s contention that political factors were a major determinant of real wages during the Weimar period. A similar argument applies to their Nazi successors, as noted by James (1986: 368). (d) Price Equation The estimation of the price-mark up leads to a relatively simple equation as shown in Equation (9) in Table 5. It is estimated in equilibrium-correction form and indicates that the mark-up adjusts slowly, as shown by the small coefficient on the equilibrium correction term. The mark- up is negatively related to labour productivity, as expected on theoretical grounds. There is a significant dynamic term in the lagged annual change in prices. This implies nominal inertia, as unexpected wage changes affect the mark-up, which is reduced by an unexpected in increase in money wages. Real import prices enter in a dynamic form with a positive coefficient as higher import prices raise the mark-up of prices on wages. Most importantly, demand-side variables, which are included in s , do not enter the price equation, implying that the mark-up is not responsive to demand shocks. The prevalence of price fixing arrangements by cartels in interwar Germany, as noted by Petzina (1990) could help to explain this result. It also agrees with the results found by Dimsdale et al (1989) in estimating the price equation for interwar Britain, which in turn is supported the well-known study of the pricing behaviour of British firms by Hall and Hitch (1938). Price setting behaviour in the two countries appears to have been similar in showing lack of response to demand shocks. 25 6. The Analysis of Medium-Term Unemployment The medium-term solution of the model for unemployment is obtained by solving out the lagged dependent variables in the wage equation (6) and the price equation (9) and setting the higher order dynamic terms equal to zero. The long-run solutions for the wage and price equations are then combined to obtain the solution for unemployment, as in Dimsdale et al (1989). This is facilitated by the absence of s from the price equation. The wage and price equations (6) and (9) become: (10) ln (W/P) = - 4.563 + 0.751 ln RTW + 0.217 ln PROD + 0.135 ln RR + 0.842 ln RR + 0.842 ? 4 ln RTW – 0.105 ln U – 0.481 ? 4 ln P (11) ln (P/W) = 0.800 – 0.176 ln PROD - 7.976 ?? 4 ln W + 1.341 ?? 4 ln W Eliminating the real wage and solving for unemployment, we get (12): (12) 0.105 ln U = -3.763 + 0.041 ln PROD + 0.751 ln RTW + 0.135 ln RR – 1.924 ? ln P* + 3.368 ? ln RTW* - 26.54 ? 2 ln W* An asterisk * indicates that annual differences ? 4 are expressed as quarterly differences. The fundamental equation for unemployment is obtained by differencing Equation (12) and setting higher order terms equal to zero, so that ? 3 ln W = 0. The tariff wage equation Equation (7) is written: (13) ? ln RTW = 0.0074 – 0.012 NDUM – 0.344 ? 2 ln RIMP We note that from differencing Equation (13), ? 2 ln RTW = 0 , since ? 3 ln RIMP= 0. Hence the difference of Equation (12) can be expressed as Equation (14): (14) 0.105 ? U / U¯ = 0.041 ? ln PROD + 0.751 ? ln RTW + 0.135 ? ln RR – 1.924 ? 2 ln P 26 This equation is used for computing the determinants of medium term unemployment. It enables us to compute the impact of the explanatory variables on unemployment between selected benchmarks. These are selected to approximate to the downturn from 1928 to 1932 and the recovery fr om 1932 to 1936. The results of the calculations are shown in the table below. Table 6 The Explanation of Unemployment Effect of Change in Variable on Unemployment Tariff Wage Replacement Ratio Productivity Price Change Total Effect 1928-32 0.090 -0.050 0.003 0.067 0.110 1933-36 -0.100 0.020 0.008 -0.063 -0.135 Change in Unemployment Contribution of Variables % Predicted Supply-Side Actual Explanation % 0.110 0.174 63.2 39.1 60.9 1932-36 -0.135 -0.166 81.3 53.3 46.7 1928-32 Demand-Side The supply-side contribution is the sum of the effects on unemployment of changes in the real tariff wage, the replacement ratio and labour productivity. The impact of demand-side shocks is through nominal inertia. Overall the fundamental Equation (14) explains 63 per cent of the rise in unemployment in the slump and 81 per cent of the fall in unemployment in the upswing. Both demand-side and supply-side variables are important in explaining the 27 course of unemployment. The demand-side variable accounts for 60.9 per cent of the explained rise in unemployment 1928-32 and 46.7 per cent of the explained decline in unemployment 1932-36. Of the supply-side variables, the real tariff wage has a major impact over the cycle, raising unemployment during the downturn and reducing it in the recovery. 7. Explaining Unemployment: A Diagrammatic Approach The explanation which the model provides of the course of unemployment can be illustrated by adapting diagrams used in Layard and Nickell (1986). In Figure 1 the labour demand function D0 is negatively sloped with respect to the real wage, where employment is on the horizontal axis. It is subject to demand-side shocks which shift it to the right or to the left. The wage equation W0 is positively sloped as a higher level of employment leads to greater tightness in the labour market. This strengthens the bargaining position of workers. It also prompts employers to offer higher wages to attract and motivate workers when there is asymmetric information in a competitive labour market. The wage function is shifted by a change in other variables in the wage equation, such as the replacement ratio and the real tariff wage. The price equation P0 is horizontal, as the price -mark up does not vary with the level of employment as previously discussed. Equilibrium employment is shown at the intersection of all three relationships in Figure 1. Under the Weimar Republic there was upward pressure on the wage function due to the institutional arrangements for determining the real tariff wage, which shifted W0 to W1 , so reducing the equilibrium level employment from E0 to E1 . In the new equilibrium at E1 the real wage is unchanged as the price mark-up is horizontal. However during the adjustment process the real wage can rise as employment declines, as shown by the arrow in Figure 2. 28 The impact of the depression was to shift the demand function D0 leftward to D1 , so that the level of employment fell to E2 . Thus the decline in employment was due partly to the shift to the left of the wage equation and partly to the leftward shift of the labour de mand function.While the shift to the left of the wage function did not have a permanent effect on the real wage, there were dynamic effects shown by the arrow in Figure 2, which caused a temporary rise in the real wage. During the contraction from 1928-32 both demand and supply-side factors were raising unemployment. The decline in the replacement ratio was tending to shift W0 to the right but this was more than offset by the upward pressure on the real wage due to the rise in the real tariff wage. Figure 2 shows that the decline in employment was due to both a fall in equilibrium employment, largely on account of an increase in the real tariff wage, and a decline in employment relative to equilibrium employment, due to a negative demand shock. Figure 1 W Real wage P D Employment 29 Figure 2 W1 W0 Real wage P D1 D2 E2 E1 E0 Employment Figure 3 W1 W2 Real wage P D3 D2 E2 E3 E4 30 Employment During the recovery the contractionary forces were reversed. There was a positive demand shock shown in Figure 3 as shifting D0 to D2 and in addition the wage function shifted from W0 to W2 , due to the reduction in the real tariff wage brought about by Nazi labour market policies. Equilibrium employment rose from E0 to E2 , while actual employment rose further to E3 due to expansionary fiscal policy under the Nazis. As the arrow in Fiure 3 shows there is a temporary fall in the real wage during the process of adjustment. Thus demand and supply-side forces acted in a mutually reinforcing way in the both the recovery and the downturn. Two further points may be noted. First, while the initial period of expansion from 1926-8 is too short for our method of analysis, something can still be said about it. The wage curve was shifting to the right, as in Figure 2, due to upward pressure on the real tariff wage reducing equilibrium employment, but actual employment was rising due a positive demand shock on account of the Weimar boom. This implies that the economy was not in equilibrium. High employment could only be achieved by generating excess de mand for labour, but this outcome was not sustainable, as Borchardt (1991) has argued. Secondly, the dummy variable for the first quarter of 1932 has a significantly negative effect on the real tariff wage. It models the consequences of the Emergency Decree of December 1931 in bringing down the contractual wage. The real tariff wage was reduced with favourable effects on employment as the reduction in the money wage was greater than the fall in prices. The Brüning wage cuts were followed by tentative policies for fiscal expansion under von Papen. Thus in its final stages the Weimar government was following policies which were 31 conducive to recovery. These policies were continued by the Nazis through pegging the nominal tariff wage, while expanding aggregate demand. Policy was directed to both reducing the NAIRU and stimulating aggregate demand. Section 6 Relevance of the Model for German Economic History The model which we have estimated is intended to be useful in assessing a number of issues in the economic history of interwar Germany. The employment equation confirms that the demand for labour was sensitive to the real wage, which supports the results of earlier work by Broadberry and Ritschl (1995). However, in our model the real wage is endogenous and one must be cautious about concluding that excessive real wages were a cause of unemployment. Demand-side variables in the form of changes in real share prices, capital imports relative to GDP, and changes in government spending had a major effect on labour demand. The importance of real share prices is strongly supportive of the contention of Ritschl (1999) that this variable was indicative of business confidence. The spike of real share prices in 1927-28 points to the contribution of domestic forces in precipitating the downturn before the decline in exports and world trade in 1929. Net capital imports also play a major role, as argued by Ritschl (1998). Changes in government expenditure were found to be statistically significant and contributed to the recovery in the demand for labour under the Nazi regime from 1933 until the end of the sample period. This suggests that claims for total crowding out of fiscal expansion by Borchardt and Balderston could be overstated. Increased real import prices had a positive effect on employment, suggesting that home production was acting as a substitute for imports. The equation supports the view that the business cycle of the 1920s peaked in 1927-28 rather than 1929, since real share prices are more powerful than the effect of capital inflows. Hence 32 Germany’s cycle of the late 1920s appears to have an upper turning point generated by internal rather than external factors, as argued by Temin (1971). Turning to the two wage equations, we have modelled a two-tier model of the labour market in which both market forces and government intervention played a major role. Balderston (1993) has proposed an informal model of this kind, which accords with our general approach. The most striking result which has emerged is that the market wage and the real tariff wage were determined by different factors. The market wage includes economic fundamentals, such as productivity growth, the replacement ratio, real import prices and unemployment in addition to the real tariff wa ge. By contrast the real tariff wage was largely determined by incomes policy variables under both Weimar and Nazis. In that sense the tariff wage was a ‘political wage’. Real import prices are the only fundamental variables included in the tariff wage equation, since other economic variables were found to be non-significant. The implication of this result is that the real tariff wage did not reflect economic fundamentals. It responded positively to upward pressure under the Weimar Republic. This effect was offset in the depression as a result of Brüning’s stringent wage reductions in December 1931. Under the Nazis the real tariff wage was reduced through the pegging of the nominal tariff wage, combined with a gradual rise in prices. Hence those writers who have argued that the determination of the tariff wage under the Weimar Republic was predominantly political are supported by our results. Borchardt (1979) has advanced this view, but some writers cited by Balderston (1993) consider the tariff wage reflected economic fundamentals through its bargaining processes. In view of the predominance of compulsory arbitration in major wage settlements, it is not surprising that political factors were dominant in resolving wage disputes. By contrast the market wage was responsive to economic variables, such as productivity, unemployment, mismatch and the 33 replacement ratio. The difference between the market wage and the tariff wage was noted by James (1986) and our wage equation serves to support his view. The wage equation shows strong evidence of nominal inertia, such that an unexpected increase in prices led to a reduction in the real wage. In the depression price declines had a positive effect on the real wage and this was an important factor contributing to a rising real wage in the early stages of the downturn. Nominal inertia was also found to be important in interwar Britain. However, in Germany there was a higher degree of wage stickiness in that real wages were affected by unexpected changes in the price level rather than in the rate of inflation. This form of wage inertia could be explained by the importance of nominal wage contracts, as noted by Balderston, and the pegging of the nominal tariff wage under the Nazis, as noted by both James and Bry. The rise in the market wage which occurred under the Nazis from 1934 is attributed to efficiency wage factors, which encouraged firms to bid for labour and to seek to provide incentives for the individual worker. This interpretation is consistent with the discussion of the labour market under the Nazis in Overy (1996), Mason (1966) and Siegal (1985). Section 7 Conclusion The analysis of unemployment suggests that there was strong upward pressure on real wages under the Weimar Republic. This more than offset the effects of productivity growth on unemployment, which appear to have been negligible. During the Great Depression there was a negative demand shock, which was communicated to the labour market by nominal inertia. On the supply-side the effect of the ris ing real tariff wage was partly offset by the decline in the replacement ratio. Thus both demand and supply-side influences reduced employment in the 34 downturn. During the recovery of the 1930s nominal inertia played a major role in transmitting a large positive demand shock to the labour market. The impact of the Nazi policy of fixing the nominal tariff wage had a major effect on the real wage and on unemployment so that supply side forces contributed to recovery. Unlike interwar Britain where demand shoc ks predominated in both slump and recovery, in Germany demand and supply-side forces reinforced each other in both phases of the cycle. This finding could help to explain both the severity of the downturn in Germany and the vigour of the recovery under the Nazis. 35 References Balderston, T. (1977), ‘‘ The German business cycle in the 1920s: A comment ’’, Economic History Review 30 : 159-61. Balderston, T. (1982), “The origins of economic instability in Germany 1924-1930: Market forces versus economic policy”, Vierteljahrschnift Fur Social und Wirtschaftgeishiche 69: 488514 ? Balderston, T. (1983), “The beginning of the Depression in Germany, 1927-30: Investment and the capital market”, Economic History Review 36: 395-415 Balderston, T. (1993), The Origins and Cause of the German Economic Crisis, 1923-1932 (Berlin: Haude and Spener) Beenstock, M. and Warburton, P. (1991), “The market for labour in inter-war Britain”, Explorations in Economic History 28: 287-308.? Benjamin, D.K. and Kochin, L.A. (1979), “Searching for an explanation for unemployment in inter-war Britain”, Journal of Political Economy 87: 441-78.? Borchardt, K. (1991), “The economic causes of the collapse of the Weimar Republic” in K. Borchardt (ed), Perspectives on Modern German Economic History and Policy (Cambridge: Cambridge University Press). Borchardt, K. (1990), “A decade of debate about Bruning’s economic policy” in J. von Kruedener (ed.) Economic Crisis and Political Collapse: The Weimar Republic 19241933 (Oxford: Berg) Borchardt, K. (1984), “Could and should Germany have followed Britain in leaving the Gold Standard?”, Journal of European Economic History 13, 471-98 36 Borchardt, K. and Ritschl, A. (1992), “Could Bruning have done it? A Keynesian model of interwar Germany, 1925-1938”, European Economic Review 36, 695-701 Broadberry, S.N. and Ritschl, A. (1995) “Real wages, productivity and unemployment in Britain and Germany during the 1920s”, Explorations in Economic History, 32, 327-49 Bry, G. (1960), Wages in Germany 1871-1945 (Princeton: Princeton University Press) Dimsdale, N.H., Nickell, S.J. and Horsewood, N. (1989), “Real wages and unemployment in Britain during the 1930s”, Economic Journal, 99, 271-92 Eichengreen, B., (1992), Golden Fetters: The Gold Standard and the Great Depression, 19191939 (Oxford: Oxford University Press). Eichengreen, B., (1994), “Perspectives on the Borchardt debate” in C. Buchheim, M. Hutter and H. James (eds), Zemisens Zwischenknigszeit (Baden Baden: Nomes Verl Gis), 177-203 Falkus, M.E. (1975), “The Germa n business cycle in the 1920s”, Economic History Review, 28, 451-65. Foreman-Peck, J. Hughes Hallett, A., and Ma, Y.(2000), Economic Modelling , 17, 515-44. Guillebaud, C.W. (1939), The Economic Recovery of Germany (Cambridge: Cambridge University Press).? Hall,R.L.and C.J.Hitch, (1951), ‘’ Price Theory and Business Behaviour’’ in Oxford Studies in the Price Mechanism , T.Wilson and P.W.S.Andrews (eds) (Oxford: Oxford University Press). Holtfrerich, C-L (1990), “Was the policy of deflation in Germany unavoidable?” in J. von Kruedener (ed.) Economic Crisis and Political Collapse: The Weimar Republic 19241933 (Oxford: Berg) 37 James, H. (1986), The German Slump: Politics and Economics 1924 -1935 (Oxford; Clarendon Press). Kindleberger, C.P. (1973), The World in Depression, 1929-39 (London: Macmillan) ? McNeil, W.C. (1986), American Money and the Weimar Republic (New York: Columbia University Press) ? Overy, R.J. (1982), The Nazi Economic Recovery 1932-38 (London: Macmillan) ? Petzina, D. (1986), “The extent and cause of unemployment in Weimar Republic” in P.D. Stachara (ed), Unemployment in the Great Depression in Weimar Germany (London; Macmillan) Phelps Brown, E.H. with M.H. Browne (1968), A Century of Pay (London: Macmillan) ? Ritschl, A. (1999), “Peter Temin on the onset of the Great Depression in Germany; A reappraisal”, mimeo Ritschl, A. (1998), “Reparation transfers, the Borchardt hypothesis and the Great Depression in Germany, 1929-32: A guided tour for hard-headed Keynesians”, European Review of Economic History, 2, 49-72. Schuker, S.A. (1988), American Reparations to Germany, 1919-33: Implications for the Third World Debt Crisis, Princeton Studies in International Finance no 61 (Princeton; International Finance Section)? Schmidt, C.T. (1934), German Business Cycles 1924-1933 (New York: NBER). Sommariva, A. and Tullio, G. (1987), German Macroeconomic History, 1880-1979 (London: Macmillan) Stachura, P.D. (ed) (1986), Unemployment and the Great Depression in Weimar Germany (New York: St Martin’s Press)? 38 Stolper, G. (1967), The German Economy: 1870 to the Present (London: Weidenfeld and Nicholson) Temin, P. (1971), “ The beginning of the Depression in Germany”, Economic History Review 24, 240-8. J. von Kruedener (ed.) Economic Crisis and Political Collapse: The Weimar Republic 1924-1933 (Oxford: Berg) Voth, H-J (1995), “Did high wages or high interest rates bring down the Weimar Republic? A cointegration model of investment in Germany, 1925-1930”, Journal of Economic History, 55, 801-21.? 39 Appendix DATA APPENDIX Primary Data Sources Statistisches Reichsamt (1927), Statistik des Deutschen Reichs, Band 402, Volks-, Berufs- und Betriebszählung vom 16. Juni 1925, ‘Die berufliche und soziale Gliederung der Bevölkerung des Deutschen Reichs’, Berlin. Statistisches Reichsamt (1934), Statistik des Deutschen Reichs Band 453, Volks-, Berufs- und Betriebszählung vom 16. Juni 1933. ‘Die berufliche und soziale Gliederung der Bevölkerung des Deutschen Reichs’, Berlin. Statistisches Reichsamt (1924-1937), Wirtschaft und Statistik, Berlin. Institut für Konjunkturforschung (1933, 1936), Konjunkturstatistisches Handbuch, Berlin. Institut für Konjunkturforschung (1933-7) Vierteljahreshefte zur Konjunkturforschung, Berlin. Institut für Konjunkturforschung (1933-7), Wochenbericht zur Konjunkturforschung, Berlin. Reichsarbeitsministerium (1924-1937), Reichsarbeitsblatt, Berlin. Board of Trade Journal. Reconstruction of Series Introduction In view of the intensity of exchange, the debate on the economic determinism of Weimar's political downfall has suffered from a surprising heteroge neity in data definitions and a poor documentation of essential labor market variables. Thus, as has already been pointed out by others (Voth, 1995: 804), the fact that for instance Borchardt's debate-launching article used Health Insurance employment data to define a ratio of registered unemployment against mandatorily insured wage labor only, caused the paper to systematically overstate the extent of unemployment in the Weimar economy, tar nishing its claim of a troubled labour market well before the 1930s and biasing its comparison with the prewar economy. 1 Similar criticisms, surprisingly enough, apply to Borchardt's initial critics, as well as to subsequent participants in the debate in general with respect to data series on employment, unemployment, wages and appropriate deflators. To the extent that different authors have sought to reconstruct data on these issues –reconstructed series for all of which are used in combination here- they have made a largely implicit use of different (annual) labor force and unemployment concepts. Similarly, in delimiting real wage behaviour different price indices and wage series have been employed. 2 1 Borchardt (1981: 81). Thus, alternatively, unpaid family members according to the 1933 census have for instance been included when specifying rates of unemployment based on a static labor force definition, producing a vastly contrasting result when linked to registered unemployment (cf. Balderston, 1982: 488). Similarly, Peukert (1988) combines Galenson and Zellner’s (1957) estimates of unemployment among union members with census data. The critcism here also relates to the widespread use of (readily available) tariff wages rather than actual wage earnings (which required reconstruction, see below) 2 40 All this is even more remarkable in the light of the fact that, as recently documented in detail by Tooze (1999), the Statistisches Reichsamt (the Reich's Statistical Office) and Ernst Wage mann's Institut für Konjunkturforschung (Institute for Business Cycle Research) were the main instruments in an unprecented effort by the new German state to invest in social engineering through economic statistics. Influenced by the postwar settlement between nationalist and socialist forces underwriting the viability of the Republic and the drive for Sozialpolitik reflected in wage arbitration and the system of permanent negotiations, these institutions (and the Reichsarbeitsministerium) produced a body of data that is unmatched both in scope and in its conformity to the concepts of modern labour market analysis (cf. Corbe tt, 1991). Our goal in reconstructing essential labour market variables for the post-inflation Weimar years has been twofold. First, we sought to impose theoretically correct definitions: actual rather than tariff wages where appropriate, use of correctly defined price series in deflating wages, production costs, share prices and GDP, and dynamic rather than static concepts of employment. Second, we strived to establish a quarterly observation frequency for all data. Inasfar as main labour market variables with tight statistical definitions have been established (cf. Balderston, 1993) these are given as annual data only. Similarly, before Ritschl’s (1999) major revision of Hoffmann’s national accounts estimates for the interwar years, essential macroeconomic variables were available at annual intervals only. Yet in the final years of the Weimar Republic both political and economic events unfolded in the course of months, rather than years. Accordingly, if we are to make sense of the mechanics of Weimar’s politicoeconomic predicament on the basis of estimated relationships, it is desirable to raise the frequency of the available data. Much of the original underlying data used here to obtain quarterly observations are available on a monthly basis. However, some are not (most notably the national accounts series). Moreover, it would seem unlikely that the theoretical linkages imposed would have worked themselves out within the course of a single month, compounding the already considerable problem of establishing the econometrically appropriate lag structure of the estimated relationships. Employment Basic information on the size of the German population in work during the interwar period stems from the occupational censuses (Berufszählungen) held in 1925 and 1933. 3 In addition to these static estimates, the IfK’s Handbuch reports monthly statistics on dependent employment based on Health Insurance membership starting in 1924. If a perfect match could be established beween the Health Insurance series and a subset of categories defining wage and salary employment in the census returns, the problem of obtaining estimates of the population in work on a quarterly or even monthly basis would be limited to the task of obtaining estimates of self-employment and those not covered by mandatory insurance (domestic servants and higher paid salary earners). However, a major obstacle in using the 1925 census for such a purpose is that those declaring themselves to be predominently active within a given sector were not classified as either currently employed or out of work. Moreover, largely due to the income ceiling on mandatory insurance, such an exact match is also not forthcoming for the 1933 census, where the distinction between those in work and those and the use of the Reichsamt’s likewise readily available wholesale price index or the price index of finished industrial goods in deflating aggregate wage costs, rather than deflators of Final Expenditure or GDP (cf. Corbett, 1991). 3 Before this only the 1907 census provides data although annual reconstructions have been made for other years; cf. Reulecke (1974). 41 declaring themselves to be unemployed. 4 Even so, as first emphasized on the basis of annual series by Balderston (1993), considerable importance is attached to the use of dynamic labour force estimates in calculating the rate of unemployment (rather than for instance an interpolation between the similar levels of the 1925 and 1933 censuses). The reason being the intermittent rise in the rate of labour participation during the second half of the 1920s and its subsequent decline during the years of the Depression. Appendix Table 1. Adjusting the 1925 census for unemployment (in thousands) Occupational census of 16 June 1925 (employed and unemployed) Registered unemployment (on subdivision see Note) Estimated employment Arbeiter: Angestellte und Beamte: 14433.754 5274.232 Wage and salary labour 19707.986 379.183 19328.803 5538.500 1325.587 0.255 21.562 5538.245 1304.025 26572.073 401.000 26171.073 Selbständige: Hausangestellte: Estimated labour force Mithelfende Familienangehörige: Hauptberuflich Erwerbstätige: 5437.227 32009.300 Note: registered unemployment corrected for employed job search is available only on an aggregate level. Subdivision according to socioeconomic group has been achieved by imposing the distribution of Erwerbslosen in the 1933 census. Given the order of magnitudes involved, the choice is of little consequence. Its imposition is necessary, however, in order to distinguish total wage employment from employment in domestic services (Hausangestellte) and Selbständige before matching the former to Health Insurance employment data. Sources: Statistik des Deutschen Reichs, Band 402 (1927) and 453 (1934); Konjunkturstatistisches Handbuch (1933, 1936). The method used to obtain employment series at quarterly intervals consisted of four steps. First, the results of the 1925 census were corrected for unemployment on the basis of the information provided by the labour exchanges (originally providing job search data only, subsequently corrected for employed job seekers, see below). 5 This is reported in Appendix Table 1. Second, as was first pointed out by Ritschl (1999: 251) the published Health Insurance data cannot be readily used. The reason for this is that over the course of the 1920s, the coverage of the series across local Krankenkasse increased steadily, causing a spurious upward bias in the growth of employment up until 1929. In correcting for this effect it is, however, possible to make use of the fact that the statistics additionally report changes relative to last year's coverage (or Berichtskreis). From this, an index can be constructed which can be linked to the absolute level of employment in later years 4 Insurance was mandatory up to an annual income of 8400 RM. Registered unemplo yment in June 1925 amounted to 401 thousand, as opposed to 5,039 million in June 1933 (source: IfK Handbuch). This huge difference is also the reason to discount potential distortions originating from the different procedures of establishing the total number of those in work in both censuses used here: 1925: census employed and unemployed minus registered unemployment; 1933: census employed plus registered unemployment (for reasosns stated below). 5 42 (where there seizes to be a difference between the publsihed data and the index). Third, to correct for the limited coverage of mandatory insurance, the monthly Health Insurance data on dependent employment was raised to the level of the subset of those employed as Arbeiter, Angestellte and Beamte according to the 1925 and 1933 censuses using Chow-Lin interpolation. In both June 1925 and June 1933, Health Insurance data covers 92.3 percent of census wage and salary employment. It now remains to add estimates for self-employment and domestic servants (cf. Appendix Tables 1 and 2). In the absense of more detailed information on the way in which these evolved between census dates, these are obtained as the values for the 1925 and 1933 censuses, again interpolated using the Health Insurance data. The result of these efforts is a monthly series on overall employment (subsequently compounded to quarterly averages) that conforms to the absolute levels reported in each census and traces intermittent changes in participation behavior as closely as possible. Appendix Table 2. Correcting the 1933 census for unemployment definitions (in thousands) Occupational Census of 16 June 1933 total registered unemployment estimated labour force agriculturea Arbeiter Angestellte Beamte 10136.3 3156.9 1480.8 2530.7 97.9 16.7 Wage and salary labour 14774.0 2645.3 4780.5 19554.5 1049.1 5299.8 2181.3 271,8 3,2 1320.9 5303.0 21129.0 4517.4 5055.6 26184.6 5312.1 4516.2 Erwerbstätigen Erwerbslosen 26441.1 5855.0 9033.6 309.2 Erwerbspersonen 32296.1 9342.8 Häusliche Dienste Selbständig Estimated total employment Mithelfende Familienangehörige Notes: a: including fisheries and foresters (Forstwirtschaft und Fischerei). Sources: Statistik des Deutschen Reichs, Band 453 (1934); Reichsarbeitsblatt (1933); Stand der Arbeitslosigkeit am 16.6.1933 nach den Meldungen der Arbeitsämer, Hauptstelle der Reichsanstalt für Arbeitsvermittlung und Arbeitslosenversicherung (1933). The subdivision of unemployment again is based on the distribution of Erwerbslosen in the 1933 census. It is of no importance to the reconstructions (and the link to Health Insurance data) since the census itself states employment figures. It is merely given to allow for a comparison with the 1925 results (cf. Appendix Table 1). Registered unemployment Although statistics on job search, unemployment among union members and the number of those receiving benefit appears in the appendices to the Reichsarbeitsblatt and in Wirtschaft und Statistik 43 as of the early 1920s, the number of people already out of work registered at the labor exchanges does not feature among these until August 1929. 6 As of this date, the Reichsarbeitsblatt surveys do state a count of the number of unemployed according to this definition while in later years job search figures were corrected by the Institut für Konjunkturforschung to arrive at monthly unemployment figures for the preceding period (data starts January 1924).7 In addition, the information provided by each of the thirteen regional labor exchange administrations was broken down by region, industry (28 categories, with separate 'Lohnarbeit wechselnder Art', 'Maschinsten und Heizer' and 4 'Angestellte' headings) and sex, and published together with the number of jobsearchers. 8 Early efforts at obtaining internationally comparable rates of unemployment for the Weimar years have typically started from the statistics of unemployed union members already mentioned (Galenson and Zellner, 1957). When assessing unemployment during the inflation years or considering a potential long-term change –as originally argued by Borchardt- in the extent of unemployment before and after the war, these data may still be used in a meaningful way. 9 Yet as already pointed out by others (Balderston, 1993: 416), given the IfK corrections of the 1924 to 1929 job search data for those seeking new work while currently employed and the detailed publication of the same series thereafter, the number of people registering at the labor exchanges as actively seeking work provides a far better and internationally comparable measure of joblessness. And while it is true that part of those able to register in Germany may not have qualified for benefit and associated registration in for instance Britain (causing Balderston to adjust the German data downward to obtain a concurrency in definitions), appropriate definitions of unemployment would suggest the broad coverage of the Weimar system to be closer to theoretical guidelines, causing us to adopt the original series. Nevertheless, one important problem of interpretation remains in defining the absolute level of unemployment for the later Weimar years. The total number registered as seeking work on 16 June 1933 -the day of the occupational census- only amounts to some 88 percent of the number of people who described themselves as 'Erwerbslos' on the census returns for that same day -91 percent in nonfarm jobs and only 70 percent in agriculture (Weigert, 1934: 8-9, 23). In other words, and as Appendix Table 2 makes clear, there is a difference of no less than some eighthundred thousand people (or 3 percent of the census definition workforce) between the two. For some, this circumstance has been the reason to retropolate from 1933, using the level of the census and the unemployment series preferred, to obtain a measure of 'census unemployment' by using the figures thus obtained in both the numerator and denominator of the calculated unemployment rate. Thus, Galenson and Zellner (1957) and their uncritical followers assumed this alleged 'hidden unemployment' to have been proportionately constant to the trade union unemployment series. Likewise, Corbett (1991: 8, 133), without specifying the underlying assumption, states that he uses the 'numbe of job seekers registered at official labor exchanges' in combination with the census result, leaving uncertainty as to his actual choice of dynamic data, given the difference between registered job search and actual unemployment emerging as of late 1929 (see above). Rather than adopting any of these unverifiable assumptions and following both Theo Balderston (1993: 418) and the work by contemporary expert Oskar Weigert (1934: 8-9) on 6 And therefore not, as Balderston (1993: 416) suggests on the basis of annual data from the Statistisches Jahrbuch (1930: 316), “from 1930”. Cf. Konjunktursta tistisches Handbuch (1933: 15; 1936: 16). 8 Cf. Wirtschaft und Statistik and Reichsarbeitsblatt, both passim as of August 1929. 9 Note that Peukert (1986: 32-5) for instance still uses the Galenson and Zellner estimates side by side with unemployment rates by region based on registered unemployment and the Health Insurance employment series. 7 44 this issue, we interpret the difference as evidence that those who did declare themselves to be without work in the census returns but failed to register, were in fact 'discouraged workers' or agricultural family members who were not actively seeking work and therefore had no part in influencing any of the labour market equilibria analysed. 10 Prices Consumer prices The official consumer price index, originally published on a monthly basis in successive volumes of the Statistische Jahrbuch für das Deutsche Reich, Wirtschaft und Statistik and the supplement to the IfK's Wochenbericht is restated in Bry (1961: 422-6), both in its compounded version and broken down by the principal expenditure categories underlying its overall composition (food, housing, fuel and light, clothing and miscellaneous). The expenditure weights underlying the integration of these series into a single index have, however, more recently been criticized by Hachtmann (1988), pursuing an early critique by Livchen (1944). With respect to the period under consideration here, the empirical basis of the expenditure weights underlying the Reichsamt CPI remained unchanged until the autumn of 1934. After this, the weights -hitherto based on a 1907 survey of household budgets adjusted to 1913-4 relative prices- were replaced by values derived from a 1927/8 survey and the number of retail prices included was enlarged from 67 to 116. 11 However, surviving inquiries into houshold expenditure patterns between 1927/8 and 1937 not surprisingly suggest that changes in relative prices (with especially housing being slow to adjust) and the change in labor incomes that res ulted from unemployment, deflation and early Nazi policies induced marked changes in budget allocation, thus potentially biasing the official index (cf. Appendix Table 3). In order to assess the impact of these imperfections (and given that Hachtmann did not establish the effect of his suppositions but merely asserted their significance), we matched interpolations of his budget inquiry-weights to the separate sub-price indices mentioned, to obtain an alternative CPI series. 12 It appears that the choice is of limited importance, as the divergence between both series is relatively small (with a maximum of two percentage points between 1926i and 1929i, cf. Appendix Table 4), and the choice leaves the chronology of real wage behaviour virtually unaltered. This prompted us to retain the offical index. Import prices As of January 1928 these are implicit in the statement (by month) of nominal import and export values and their respective volumes in 1928 Reichsmarks in the Konjunkturstatistisches Handbuch 1936 (pa ge 90-4). The Handbuch survey breaks off in September 1935, but the identical data series is pursued in the Vierteljahreshefte zur Konjunkturforschung. For the years before 1928, both the 1933 and 1936 Handbuch only state nominal values. The problem was solved by starting from the annual import and export values and volumes in the national accounts reconstructions by Ritschl (1999) and interpolating the relevant price series using the Chow-Lin method and the Reichsamt's monthly wholesale price index as the proximate series. After splicing the two series, the combined index was compounded to quarterly observations. TFE deflator 10 On this type of participation behaviour cf. Bowen and Finnegan (1969). Cf. "Neuberechnung der Reichsindexziffer der Lebenshaltungskosten" Vierteljahreshefte zur Statistik des Deutschen Reiches (1934iv: 102ff.). 12 In doing so we skipped the small, as well as potentially biased, sample of 90 'better situated' although unemployed Berlin families in 1933. 11 45 The total final expenditure deflator is defined as the combination of import prices and the GDP deflator with weights given by current-value imports and gross domestic product. Import values at current prices are given in the Konjunkturstatistisches Handbuch and in the Wochenbericht for the end of the observation period. On nominal import values see above, on quarterly observations for nominal GDP see below. 46 Appendix table 3. Expenditure weights in the Reichsamt's official cost of living index and according to contemporary worker household budget inquiries, 1907-1937 food housing fuel & light clothing othera Reichsamt weighting until Sep. 1934 Reichsamt weighting after Sep. 1934 56.1 55.4 16.1 13.1 5.4 4.7 10.9 12.9 11.5 13.9 522 worker families Feb. 1907 - Jan. 1908 896 worker families Oct. 1927 - Sep. 1928 90 unemployed families, Berlin summer 1933 Statistical details unspecified, 1935 1000 worker families, 1937 56.0 55.4 56.8 60.7 54.4 18.3 13.1 29.3 27.0 14.4 4.6 4.7 (7.7) 6.8 5.4 12.1 12.9 (2.5) 2.2 10.4 9.0 13.9 (3.7) 3.3 15.4 Source: Compiled from Vierteljahreshefte zur Statistik des Deutschen Reichs (1937iv: 102); Arbeitswis senschaftliches Institut der DAF, Jahrbuch (1938 vol 2: 336); Hohorst et al. (eds.) (1978: 113); Rosen (1939: 51); and from original materials contained in Bundesarchiv Koblenz, R43 II/Bd. 318, Bl. 167 all cited in Hachtmann (1988: 49). Notes: a: soap and wash, education, leisure, household effects and transport; figures in parenthesis originally specified as a 13.9 percent remaining total, subdivision using 1935 results. Appendix Table 4. Differences between cost of living indices measured between quarterly turning points in price level changes, 1925-1936 official adapted official adapted official adapted (1913=100) (1913=100) (1926i =100) (1926i=100) (mutation) (mutation) 1926 (i) 1929 (i) 1933 (i) 1936 (iii) 92.7 102.0 76.9 82.4 93.6 101.3 76.1 82.0 100.0 110.1 82.9 88.9 100.0 108.3 81.2 87.6 10.1 -27.2 6.0 8.3 -27.0 6.3 Sources: official Reichsamt CPI: restated in Bry (1961: 422-6); reweighted CPI: see text. GDP deflator : Taken from Ritschl (1999). Wages Tariff wages Weighted average of tariff wages for 15 branches of industry, the postal services and railways as compiled after the recalculation for the years between 1925 and 1931 in June 1931 ('Die Nachprüfung und Neubearbeitung der amtlichen Tariflohnstatistik', Reichsarbeitsblatt II. Nichtamlicher Teil, 1931: 109; Wirtschaft und Statistik, 1931: 638-9) and subsequently reported for each month ('tariffliche Stundenlohnsätze oder Akkordrichtsätze'). The actual detailed wage series are available from 1928 onward only, but this segment could be linked to a compounded series of revised data for 1925-1927 by the Reichsamt to yield an index of the average wage per hour for skilled, semi-skilled and unskilled male and female workers. For the months up to December 1933 the latter part of this index is already stated in Bry (1960: 131) and it is continued 47 in the A-section supplements to IfK's Wochenbericht, allowing for the reconstruction of an absolute series using the revised level of post-1927 wages for the three male and two female skill categories and official skill and sex weights. 13 The latter employment weights are given in the Vierteljahershefte zur Statistik des Deutschen Reichs (1931: 97). Appendix Table 5. Comparing present weekly wage estimates with earlier measures of industrial- and tariff wages (in current Reichsmarks per week) Official 'Industrie und Handwerk' This paper: economy -wide earnings This paper: hours and days corrected tariff wages per week 1925 1926 1927 1928 1929 1930 1931 1932 1933 1934 1935 1936 32.12 33.35 37.37 42.81 44.09 40.61 35.73 29.51 30.16 32.36 33.15 34.40 34.77 37.03 38.94 42.33 44.21 44.24 41.66 36.44 34.98 34.13 34.40 35.84 35.57 37.76 39.70 43.17 45.24 45.27 42.64 37.06 35.93 35.04 35.33 36.78 25.09 26.70 28.83 31.25 33.01 32.71 30.11 24.82 24.70 25.34 25.45 25.92 1925-1930 1930-1933 26.4 -25.7 27.2 -20.9 27.3 -20.6 30.4 -24.5 Sources: see reconstruction of wage series. As was already stressed as a shortcoming of these statistics by several early studies (Schulze, 1942; Hamann, 1945; Müller, 1954: 70), the tariff wage system and the resultant statistics did not cover agricultural wage labor. Only in Baden and Württemberg did tariff rates exist (without dominating), but these do not enter the national statistics. In the June 1933 census agriculture covered 17.9 % of total and 12.2 % of all dependent employment (both excluding ‘assisting family members’). In addition, the fact that the tariff wage series only relate to blue collar jobs causes an underestimation of the average absolute wage and a lack of information on both the impact of likely changes in skill differentials (given the incidence of unemployment) and the extent to which public sector pay lagged in adjustment. In the 1933 census, all nonagricultural 'Arbeiter' covered 51.9 % of overall dependent employment (cf. Appendix Table 2). Money wages Given the statistical problems associated with tariff wages, and the absense in the Labor Ministry, Reichsamt and IfK statistics of information on actual wages paid wit h a comprehensive coverage 13 The wage statistics distinguish 'Facharbeiter'; 'angelernte Arbeiter' and 'Hilfsarbeiter' in the case of male workers, and combines the two former categories into a single group in the case of female workers. For a more detailed account of the methodology of the tariff wage statistics, the increase in the number of branches included (from 12 in 1924-1927 to 17 thereafter) and its 1931 revision see Gerb (1977: 38-9). 48 of individual industries, nominal wage incomes in this paper are defined as average economy-wide wage and salary earnings. The basis for calculating this variable is given by quarterly quotations of aggregate wage sums. For the period between 1925(i) and 1935(iii) these appear in the 1936 version of the IfK's Konjunkturstatistisches Handbuch (1936: 146), while subsequent estimates are given in the statistical supplements to the same institutes's Wochenbericht (B section). To arrive at estimates of average earnings, these are divided by our reconstructed series of all wage and salary employment, in the case of hourly earnings augmented with information on the number of working days per quarter and on the development in the daily number of hours worked (weekly earnings follow from multiplication of employment by the 13 weeks in each quarter). Figures on the number of working days in each succesive month and the average number of working hours per day in all industrial branches likewise appear in the Konjunkturstatistisches Handbuch (1936: 4, 32) and in the supplements to the Wochenbericht. Annual reconstructions of economy-wide working hours per person feature in the earlier wage estimates by Von Lölhöffel (1974: 150) (upon which the procedure described here improves by using different wage-sum and employment estimates). These series, finally, are combined to obtain quarterly estimates of working hours using the ChowLin interpolation procedure. As the results compounded to annual averages in Appendix Table 5 serve to indicate, the weekly and hourly estimates constructed in this fashion are some 8 (weekly) and 10 percent (hourly, raised to a six day-week for the observed number of hours per day) above the 'Industrie und Handwerk Arbeiter' earnings that have typically been used as a measure of labor incomes since Hoffmann (1965: 471) adopted the underlying Reichsamt wage estimates. 14 For reasons already stated, this difference is even larger for tariff wages. More important, however, is the difference in cyclical behavior and the adjustment to deflation. Not only do the earlier annual 'Industrie und Handwerk' series and tariff wages rise more swiftly before 1929, but they also adjust earlier and with greater vigor to the circumstances of the Depression years. The only remaining problem with the reconstruction procedure followed here is that it fails to add board and in kind-payments -which featured in agriculture and the domestic services- to the overall wage sum while using aggregate employment statistics. This should, however, not affect the chronology observed. The net average money wage that is used in the calculation of the replacement rate now consists of the hourly wage, raised to a montlhy income (on the basis of the observed average number of hours worked per day, given the importance of Kurzzeit in the Depression years), diminished by calculated average fiscal and social security deductions (see below). Tax and social security component in wedge As part of his criticism of existing real wage estimates for the late Weimar and early Nazi years, the chronology of changes in effective tax and social security deductions are documented in detail in the work by Hachtmann (1988). A similar, early effort was already made by Livchen in 1944. Additional references and annual estimates are given in Gerard Bry's (1960: 57-8) classic study of German wage development after 1870, as well as in David Corbett's (1991: 131) dissertation. Using these surveys, the special edition of the Einzelschriften zur Statistik des Deutschen Reichs on this issue covering the 1926 to 1936 period (also the main source for the authors of the secondary works cited), and the scattered listing of changes in premiums and taxes in the Reichsarbeitsblatt 14 Cf. Statistisches Jahrbuch für das Deutsche Reich (1941: 384). Examples of its use are Bry (1960: 58 and appendix table A2); Hachtmann (1988: 45); Corbett (1991: 135). 49 and the Reichsgesetzblatt, a more precise chronology of changes in deductions was constructed to allow for quarterly estimates. Since our earnings estimates differ from preceding ones (most notably the 'Industrie und Handwerk' average derived from Reichsamt surveys by Hoffmann), those deductions not levied as flat rates but originally stated as absolute deductions were recalculated using the new earnings series. In these cases we followed Corbett (1991: 131) in deriving average income and payroll taxes for a family of four with one average earner. We also follow his suggestion of setting the contribution rate of unemployment insurance prior to February 1926 (at that time set by local government at a value equal to or less than 1.5 percent) at 1 percent. The deductions take n account of are the income tax (including the crisis tax and the 'donation to aid for the unemployed'), unemployment insurance, health insurance (Krankenversicherung), disability insurance (Invalidenversicherung), accident insurance (Unfallversicherung), the head tax (Bürgersteuer) introduced in 1930, and pensions (Knappschaftliche Pensionsversicherung). In line with Hachtmann's critique, Nazi deductions officially registered as voluntary are instead considered as having been compulsory (consisting of contributions to the German Labor Front (DAF) and the Winter Relief Fund (Winterwerk)). GDP, business capital stock, government expenditure, money supply, Tobin’s Q and net capital imports All taken from Ritschl (1999). Replacement rate The replaceme nt rate is defined as the ratio of the net average money wage (see above) to the initial unemployment insurance fallback position for the average claimant. The monthly amounts issued out of unemployment insurance and the corresponding number of claimants appear in the annual 'Abrechungen der Reichsanstalt für Arbeitslosenunterstützung' published in the Reichsarbeitsblatt II (nichtamtlicher Teil) and the statistical appendix to the same source (categorized as 'Die Arbeitslosen nach Unterstützungsarten nach den Meldungen der Arbeitsämter') respectively. Since unemployment data are for the end of each month and the pool of unemployed claimants is subject to inflows and outflows over the course of that period (and not all unemployed therefore have received full monthlong benefit payments), the total sum issued cannot be compared directly to the registered end-of-month number of claimants. In arriving at an estimate of the effective number of claimants it is assumed that this net in or outflow occurs linearly ove r the course of each month. The number of people leaving or entering the pool is then weighted by the part of the month (in days) spent in unemployment, yielding a number of 'full-duration unemployed' at the end of each month which is then added to the previous end-of-month's total. Since total transfer payments are stated by calendar month (of a varying length), net weekly money wages are adjusted accordingly before calculating the replacement rate. The monthly series obtained, finally, was subjected to exponential seasonal smoothing (given lagged adjustment of registered benefit payments at seasonal peaks) and compounded to quarterly data. Note that the statistical basis of this measure (the duration of regular unemployment insurance) changed from 26 weeks, extendable to a year by the Labour Minister and local authorities (as of May 1920), to 26 weeks proper (January 1927, introduction of the AVAVG overhaul of social security), to 20 weeks 50 proper (October 1931) with a needs test after the sixth week introduced as of June 1932. 15 Even so, the mostly 26 week period delimits the most relevant timespan, given a completed spell duration that rises from a month in 1928 to a maximum of between 7 and 8 months in 1933 (cf. Corbett, 1991). Moreover, inclusion of the subsequent (lower) Emergency Relief payments, entitlement to which extended over a longer period, would cause the calculated replacement rate to become dependent on the increasing average duration of unemployment. World trade volume index Hourly productivity Defined as the ratio between real GDP and employment, with the latter adjusted for hours worked per day and days per quarter. This adjustment is identical to that used to calculate hourly wages (see above). Mismatch Mismatch is measured as the va riance of unemployment across industries. It is represented by the square of the coefficient of variation of unemployment by industry (cf. Layard et al. 1991: 286). Registered unemployment by industry is available from August 1929 for 28 categories of labour, including white collar workers. Before this date, the only data by industry available is that on job search. Data from which employed job seekers have been removed is, however, provided by the IFK at an aggregate level. The ratio of unemployed job seekers to unemployed is about 80 % in aggregate. This ratio of the two aggregate time series can be used to adjust the job search data to generate a series for unemployment disaggregated by industry. These are then related to the size of the blue collar workforce by industry according to the 1933 census (census employment plus registered unemployment on 16 June 1933). In doing so, the separate category of unemployment amongst white collar workers was deducted in proportion to the distribution of employment by sector, by type of work (i.e. blue or white collar) in the 1933 census. 15 While the needs test remained in place, these time limits were abolished in November 1937 (Reichsarbeitsblatt). On these issues also see Wermel and Urban (1949). 51
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