The Great Contraction

the evolution of inter-industry wage differentials in Sweden 1930-1950

Authors: Svante Prado and Joacim Waara

Affiliation: School of Business, Economics and Law, University of Gothenburg

The wage structure

• The wage structure is multifaceted• Our focus is inter-industrial wage differentials• Driven by market forces or institutions?• Markets (supply and demand) • Institutions:i) How wage negotiations are organizedii) The union’s bargaining poweriii) The objective’s of the negotiating parties

Measuring sigma convergence(i) Studying groups of industries+ time saving+ enables long time series- no industry-specific information

(ii) Studying industries at disaggregated levels+ gives more information+ gives more variation- Laborious (solution: we draw on a new database on

wages, HILD)- Inter-temporal heterogeneity (solution: Kinetic index

methodology (Bowley 1885; Feinstein 1990))

inter-industry wage dispersion (male), 1921-1967 (CoV)

19201922

19241926

19281930

19321934

19361938

19401942

19441946

19481950

19521954

19561958

19601962

19641966

19681970

19721974

19761978

19801982

19841986

19881990

8

10

12

14

16

18

20

22

Measuring beta convergence

• Low-wage industries grow faster than high-wage industries

• Unconditional convergence• Descriptive measure• We would like to hold constant various

factors:i) Export/importii) Skill intensity (education levels)iii) Raw material based or not

Sweden 1935-1950

• Devaluation • Excess demand for labour• Increased productivity• Rationalisation changes labour demand• Strong domestic demand in the interwar

period• Export industry expands rapidly after WWII

“The Swedish model”

• Social democratic party held the power 1932-1976

• The role of the state? (Labour union and the Social democratic party “Rowing the boat together”)

• Union monopolism• Economic planning• Private ownership• State + “big” business• Centralized bargaining for wages

1930 1931 1932 1933 1934 1935 1936 1937 1938 1939 1940 1941 1942 1943 1944 1945 1946 1947 1948 1949 1950 1951 1952 1953 195480

85

90

95

100

105

110

115

120

125

Ratio of engineering to food industry, 1930-1954