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Federal Reserve Bank of Chicago

The Role of Real Wages, Productivity, and
Fiscal Policy in Germany’ Great Depression
s
1928-1937

By: Jonas D.M. Fisher and Andreas
Hornstein

WP 2001-07

The Role of Real Wages, Productivity, and
Fiscal Policy in Germany’s Great Depression 1928-37∗
Jonas D.M. Fisher†

Andreas Hornstein‡

First Draft: October 16, 2000
This Draft: August 29, 2001

Abstract
We study the behavior of output, employment, consumption, and investment in
Germany during the Great Depression of 1928-37. In this time period, real wages were
countercyclical, and productivity and ﬁscal policy were procyclical. We use the neoclassical growth model to investigate how much these factors contribute to the Depression.
We ﬁnd that real wages, which were signiﬁcantly above their market clearing levels,
were the most important factor for the economic decline in the Depression. Changes in
productivity and ﬁscal policy were also important for the decline and recovery. Even
though our analysis is limited to a small number of factors, the model accounts surprisingly well for the Depression in Germany.
Journal of Economic Literature Classiﬁcation Numbers: E13, E32, E62, N14, O47
Keywords: Great Depression, Germany, growth model, real wages, productivity, ﬁscal
policy

∗

We would like to thank Ed Prescott for encouraging this line of research and for many helpful comments.
Thanks also to Albrecht Ritschl for various discussions and making his data available to us. We thank
participants at the ”Great Depressions of the 20th Century” conference, and seminar participants at the
University of Rochester, the University of Pennsylvania, and Humboldt Universit¨t, Berlin, for helpful
a
comments. The views expressed in this paper are those of the authors and do not necessarily represent
those of the Federal Reserve Banks of Chicago and Richmond, or the Federal Reserve System.
†
Federal Reserve Bank of Chicago (jﬁsher@frbchi.org).
‡
Federal Reserve Bank of Richmond (andreas.hornstein@rich.frb.org).

1. Introduction
The Great Depression was a period of extraordinary turbulence in modern German economic
history. From 1928 on, output declined within four years by more than 30 percent relative to
trend, and then almost completely recovered within the following ﬁve years. Employment,
consumption and investment also fell dramatically during the Depression. After the trough
of the Depression in 1932, employment and investment recovered, along with output, but
consumption stagnated.
We study the Depression in Germany from the perspective of the neoclassical growth
model. In particular, we study how changes in real wages, productivity, and ﬁscal policy
aﬀected the performance of the economy. We ﬁnd that these three factors largely account
for the macroeconomic dynamics of the German Depression.
Furthermore, we ﬁnd that changes in real wages are the most important of these three
factors in accounting for the Depression in Germany. Real wages increased by 10 percent
relative to trend while labor productivity declined. In the recovery period, real wages and
labor productivity returned to trend. We argue that a large part of the real wage movement
was due to distortions in the labor market of the German economy. In the growth model,
we treat the observed real wage changes as exogenous, and employment is determined by
the demand for labor. Holding the other two factors ﬁxed, real wage changes account for
somewhat more than two-thirds of the decline in output and all of the decline in employment
during the Depression. They also account for the later recovery in employment, some of the
stagnation in consumption, but little of the recovery in output. This suggests that labor
market distortions were important causes of the Depression in Germany.
Changes in productivity are also important factors of the Depression. Total factor productivity declined by 16 percent relative to trend and then returned to trend in the recovery
period. We treat these productivity movements as exogenous country-speciﬁc changes of the
eﬃciency of production. Holding the other two factors ﬁxed, productivity changes account
for somewhat less than two-thirds of the decline in output, and two-ﬁfths of the decline in
employment during the Depression. During the recovery phase, the subsequent return of
1

productivity to trend predicts too strong a recovery.
Changes in ﬁscal policy also have a noticeable eﬀect on the Depression, but that eﬀect is
signiﬁcantly smaller than the eﬀect of real wage and productivity changes. Under restrictive
ﬁscal policy, eﬀective tax rates increased by one-ﬁfth, and government purchases declined by
about 16 percent relative to trend. In the recovery phase, ﬁscal policy became expansive:
government purchases almost tripled from their 1932 value, while tax rates stayed relatively
high. We model the unprecedented increase of government purchases during the recovery
phase as unanticipated by the private sector. Holding the other two factors ﬁxed, ﬁscal policy
accounts for a quarter of the decline in output and employment during the Depression. On
the other hand, ﬁscal policy predicts too rapid a recovery for output and employment, but
it does account for some of the stagnation of consumption in the recovery phase.
Finally, we consider the eﬀects of a simultaneous change in real wages, productivity,
and ﬁscal policy. We ﬁnd that the combination of all three factors can account for the
qualitative features of the Depression, but it does exaggerate the quantitative magnitude of
the ﬂuctuations.
Our analysis abstracts from a number of alternative explanations for the Depression:
monetary policy, a malfunctioning ﬁnancial system, the reparation payments imposed by
the Versailles Treaty after World War I, and international trade. Given the relative success
of our simple framework, we ﬁnd this abstraction justiﬁed. Furthermore, in the next section
we point out some problems associated with the alternative explanations.
The remainder of the paper is organized as follows. First we describe the behavior of
various macroeconomic variables of the German economy 1928-37. We also describe the
German labor market and ﬁscal policy of that time period, which motivates our focus on
real wages, productivity, and ﬁscal policy. We then describe the model we used to interpret
the data. Then we discuss our results on the impact of real wages, productivity, and ﬁscal
policy.

2. The German Economy 1928-37
In this section we discuss factors of the economic history and underlying data of the 1928-37
period in Germany that motivate our focus on real wages, productivity, and ﬁscal policy.
Our discussion of the data emphasizes the behavior of German per capita output and other
variables describing the supply and demand for that output, the situation in the labor market
and the stance of ﬁscal policy. The sources for our data are described in the Appendix.
Most of the series we discuss have a trend and we display their behavior after we have
removed that trend. As a standard ﬁrst step, we normalize all series for the scale eﬀects
of population size when appropriate, that is, we express them as per capita series. There
are various ways to remove any remaining trend, and we pick one method which is operational for our purposes, and which is appropriate for the study of balanced growth paths
in the neoclassical growth model. In particular, on a balanced growth path with constant
government spending shares and tax rates, output, consumption, investment, government
purchases, real wages, and labor productivity all grow at a common rate. Therefore we
detrend the per capita series of these variables with the per capita GNP trend growth rate.1
We calculate the trend growth rate from pre-World War I GNP data. The growth rate of
per capita GNP for the period 1901-1913 is 1.87 percent. This growth rate is very close to
the average growth rate of per capita output for all of Germany from 1904-1980 which is 1.9
percent, where we use GNP before 1945, and GDP after 1945. Finally, hours worked will
have no trend, if income and substitution eﬀects cancel. We therefore do not detrend per
capita hours worked.
2.1. Decline and Recovery
The German economic expansion of the 1920s ends in 1928 when per capita GNP reaches its
peak. This expansion is followed by the Depression, during which per capita GNP declines by
about 30 percent and which lasts for four years. From 1933 on, we observe an uninterrupted
1

Unless otherwise noted all variables are in real terms, that is constant prices.

recovery until 1937. A comparison with the United States provides some perspective on
the extent to which the Depression aﬀected Germany. In Figure 1 we display the path of
detrended per capita GNP in Germany and the United States for the years following their
respective pre-depression peaks and the two years preceding the peaks. First note that the
U.S. expansion in the 1920s reaches its peak in 1929, one year after Germany. Second, the
magnitude and the duration of the output decline in the depression is almost the same in
the two economies. Third, the recovery from the depression is diﬀerent in the two countries:
Germany’s recovery lasts for ﬁve years until 1937, whereas the U.S. recovery phase stalls
after about three years in 1936. We end our study of the German economy in 1937, because
from 1938 on, the data on the German economy are not reliable, for two reasons. First, in
1938 Germany annexes Austria and there are no longer any separate oﬃcial statistics on
the two countries.2 Second, World War II begins in 1939 and the data for the German war
economy are even less reliable.
Although the Depression appears to be of a similar magnitude in Germany and the United
States, it does play a diﬀerent role in Germany’s interwar period. This can be seen in Figure
2, which displays German and U.S. per capita output from 1901 to 1993. We can see that
the Great Depression represents a singular event in the 20th century for the United States.
But for the 20th-century German economy, economic activity is below trend for the complete
interwar period, and not only for the years of the depression. Over the duration of World
War I, German per capita GNP declines by 30 percent, and output never really recovers the
pre-World War I levels. Even in 1928, when the German economy is at its peak, output is
still below the trend growth level.3
2

Attempts have been made to construct separate estimates of Austrian and German GNP, e.g. Maddison
(1991). We are not convinced that these numbers are reliable, see the Appendix.
3
A number of economic historians have therefore suggested that the causes of the depression in Germany
lie in the years before 1928. For example, Borchardt (1979) argues that developments in the labor market in
the mid-1920s contributed to the Depression in Germany. We do not pursue this argument here, and take
the state of the economy in 1928 as given.

2.2. Production
The Depression represents an unusually big decline in economic activity. In Table I, we
display the behavior of output, capital and labor inputs, and productivity measures for the
time period 1928-1937. In that table and the tables that follow we use bold to indicate the
year in which output reaches its trough.
The large fall of production in the Depression is accompanied by a similarly large decline
of employment: in 1932 employment is 26 percent below its 1928 level.4 Since output
declines more than does employment, labor productivity declines in the depression: in 1932
it is 9 percent below its 1928 value. However, labor productivity recovers as sharply as it
declined and within four years it is back to its 1928 levels. Not only does labor productivity
decline, which could be attributed to a declining capital stock, but total factor productivity
(TFP) declines even more than does labor productivity.5 This happens since, even though
investment collapses and the capital stock declines, the capital-labor ratio still increases.
Accounting for the eﬀects of a higher capital-labor ratio means that TFP declines by 13
percent during the depression. We again observe a very fast recovery within four years after
1932.
Aggregate real wages are shown in the last column of Table I.6 In contrast to productivity,
real wages are strongly countercyclical in the 1928-37 period. In the Depression, real wages
increase by 11 percent, returning slowly to their 1928 levels. Given the steep decline of
productivity in the Depression, the increase of real wages during this time is puzzling.
Real wages increase for two reasons. First, in the early phase of the Depression, nominal
wages increase and they start to decline slowly only later on. In Figure 3 we display nominal
4

Our estimates of the employment decline in Germany are conservative, see the discussion in the Appendix, Table A.1.
5
We calculate TFP as the Solow residual from our measure of output, and our input measures capital
and labor, assuming a constant labor income share. We use our estimate of the average labor income share
for the German economy 1925-37, described in the Appendix.
6
Real wages are nominal wages from L¨lh¨ﬀel (1974) deﬂated with the wholesale price index of ﬁnished
o o
manufatures from Bry (1960). In the Appendix we discuss alternative measures of aggregate nominal wages.
The deﬂator appears to be the standard one used in studies of the German economy of the 1920s. The
deﬂator is also the closest we can get to a product wage for manufacturing.

hourly labor cost by industry, 1928-37. We can see that for almost all industries, nominal
wages start to decline only from 1930 on, that is, two years into the Depression. Second,
in 1930 the German economy deﬂates substantially. In Table II we can see the extent of
price deﬂation in the Germany economy. From 1928 to 1933, the price level in Germany
falls between 20 and 30 percent, depending on the price index used, and most of this decline
takes place from 1930 on. With these dynamics of nominal wages and prices, detrended real
wages increase substantially from 1928 to 1931.
It is reasonable to assume that money plays some role in the Depression, since the price
decline contributes so much to the increase in real wages. There also is a large body of
literature which contends that monetary policy, in particular a malfunctioning gold standard, plays a major role in the Depression; see Eichengreen (1992). In the mid-1920s most
industrial countries return to the gold standard as the monetary system. In Germany, the
gold standard is reintroduced in 1924 as part of the Dawes Plan revision of reparations payments. Mid-1931 Germany experiences a banking crises, after the DANAT Bank fails in July
1931. This crisis in the ﬁnancial sector comes while the Depression is already well under
way, and it may contribute to the depression or simply reﬂect the stresses imposed on the
economy by the depression. In response to the banking crises, the Reichsbank introduces
foreign exchange controls and eﬀectively abandons the gold standard (James, 1986).
To the extent that monetary policy aﬀects the economy, we would expect that this is
reﬂected in the behavior of M1 (see Table II). Indeed we can see that non-detrended M1 and
prices follow a similar trajectory, at least in the Depression. We might note, however, that
the money stock lags output by about a year. This lag in the money stock relative to output
is one justiﬁcation to focus our analysis on real factors, at least initially. In this paper we
therefore investigate an alternative view of the time path of real wages, namely that they
reﬂect changes in the underlying structure of the labor market.7
7

Our analysis continues to address monetary issues indirectly, through the impact of general price movements on real wages.

2.3. Wage Determination in the Labor Market
Wage setting in the German economy of the 1920s is to a large extent the outcome of collective
bargaining between unions and employers and/or employer federations, and the government
exercises a considerable degree of control.8 The Stinnes-Legien Agreement (November 15,
1918) and subsequent legislation establish the collective bargaining system in the post-World
War I German economy.9 Collective bargaining determines wages and working conditions,
and in case of conﬂict an arbitration committee determines the contract. From October
1923 on, arbitration committees are under the supervision of the Reich Labor Ministry
and the chairman of the committee, usually a Ministry bureaucrat, can impose binding
arbitration (decree from December 1923). The Reich Labor Ministry can make arbitration
legally binding, which makes subsequent strikes and lockouts illegal. In general, the Reich
Labor Ministry and its arbitrators are seen as sympathetic to the wage demands of the
unions.
At the time of the Depression, a substantial fraction of the labor force is subject to some
form of collective bargaining.10 Two-thirds of blue-collar workers, which make up about half
of the labor force, are covered. In addition, about 30 percent of white-collar employees are
union members, and white-collar employees make up about 17 percent of the labor force.
From this we conclude that about 40 percent of the labor force, most of it in manufacturing,
mining, and building crafts, are probably subject to some form of collective bargaining.
After the hyperinﬂation of 1923, unions use the collective bargaining system to negotiate
wage increases, which make up for real wage losses experienced in the hyperinﬂation. In 1927
the Reich government raises public sector pay by 33 percent, in response to which the unions
bargain for comparable wage increases, because they anticipate a renewal of inﬂation. After
1928, large unions are faced with competition from radicalized independent unions with links
8

Our description of the German labor market relies heavily on Bry (1960) and James (1986).
The collective bargaining system extends arrangements from the war economy. Another element of
the Stinnes-Legien Agreement is the introduction of the 8-hour workday/48-hour workweek. This feature
survives until 1923.
10
The following estimates are based on Bry (1960), 24-45.
9

to the German Communist Party, and they initially refuse wage cuts during the Depression
(James 1986, p. 216). In an attempt to deal with budgetary problems created by the
Depression, the government reduces civil service pay by 20 percent in 1931. In the belief
that wages in general are too high, the government at the end of 1931 tries to reduce private
sector wages by decree to their January 1927 level.
In 1933, after Hitler takes power, the unions are dissolved and become part of the German
Labor Front, an umbrella organization which includes all labor market participants. This
organization serves the political and economic paciﬁcation of the labor market. Initially
the Nazi regime supports minimum wages (National Labor Law, January 1934). After the
recovery is underway, the Nazi regime then tries to limit wage increases by setting maximum
wages and restricting labor mobility.11
2.4. Expenditures
We now turn to the behavior of the expenditure components of German GNP: government
spending on goods and services, private consumption and investment, and exports and imports. Panel A of Table III displays these series in levels and Panel B of Table III displays
them as shares of real GNP.
In response to a worsening budget situation in the Depression, the government follows an
austerity policy. This policy is usually associated with the name of Br¨ ning, the chancellor of
u
the German Reich in the years 1930-32. On the expenditure side, the austerity policy involves
reductions of government spending, and most of these cuts aﬀect government investment
spending. But cuts in investment spending have only a limited eﬀect on overall government
spending, since government spending on goods and services is essentially determined by the
behavior of government consumption, which represents about 80 percent of total government
spending on goods and services. For example, by 1932 public spending on construction
has been cut in half, but overall government spending is down only 10 percent because
11

The regime also uses the system of agricultural price controls to support the wage controls. There is
some doubt on how eﬀective all of these interventions in the labor market actually were, James (1986).

government consumption is almost back to trend. The biggest reductions in government
spending take place in 1931-32. These expenditure cuts include the previously mentioned
reductions of civil service pay: from December 1930 to December 1931 civil service pay is
cut by about 20 percent. These pay cuts not only apply to the Reich, but also to state and
municipal employees. But even in these years, the share of government spending in GNP
is stable or increasing. In 1933 Hitler comes to power, and during the recovery from 1933,
on government spending increases in only ﬁve years to more than twice its 1928 level. This
expansion of the budget is mainly driven by military expenditures. By 1937, government
claims more than a quarter of total production. It is then not surprising that contemporaries
view German ﬁscal policy as an example of demand management policies, especially the ﬁscal
expansion of the Hitler regime.
Private consumption and investment decline more in the Depression than do their government counterparts. Consumption never regains its 1928 level during the Nazi recovery,
but investment makes a complete recovery. At the depths of the Depression, private consumption has been reduced to three-fourths of its 1928 peak, and private investment has
collapsed. In 1931 business investment is about 5 percent of its 1928 peak. Most of this
decline is due to an enormous inventory reduction, but in 1932 even ﬁxed investment is less
than one-third of its 1928 peak.12 From then on, private investment stages a full recovery,
but private consumption stagnates at its depression levels. This pattern reﬂects the policies
of the Nazi government that allow a restoration of productive capacity through investment,
but divert resources from private consumption toward government consumption. As a result,
in 1937 only 63 percent of total production goes to private consumption, as opposed to 75
percent in 1928.
Foreign trade does not appear to be an important contributing factor to either the decline
or the recovery. During the early years of the Depression, exports continue to grow faster
than trend and only in 1932 do they fall below trend. Trade volume reaches its peak only
12

In our data set, Ritschl (2001), inventory investment is not deﬂated. Given the substantial deﬂation
over this time period, the nominal inventory decline understates the real decline of inventories.

in 1931, when the sum of real exports and imports is about 45 percent of real GNP. On the
other hand, it is unlikely that the expansion after 1933 could be driven by trade, since after
1932, the trade volume starts to decline to about 25 percent of real GNP.
2.5. Fiscal Policy
Since it plays an important part in our analysis, we now provide more detail on ﬁscal policy.13
Government plays a bigger role in the German economy after World War I relative to the
prewar economy, at least in terms of the share of government spending and taxation in GNP.
The main budgetary expenditure components of the central government, the Reich, are social
spending (about 40 percent, excluding education) and agricultural subsidies. The main tax
sources are a corporation tax, income tax and a turnover (sales) tax. In the previous section
we outlined the behavior of real government spending on goods and services (see Table III).
In the following discussion, we also refer to the time paths of implicit tax rates and the GNPshare of government spending and transfers displayed in Table IV. The income tax measure
is the sum of nominal direct taxes and contributions to social security and unemployment
insurance divided by nominal factor income. The sales tax measure is the ratio of indirect
taxes minus subsidies to GNP less indirect taxes minus subsidies.14 All data are taken from
Ritschl (2001).
For most of the post-World War I period, German governments run deﬁcits, and they
have problems ﬁnancing these deﬁcits. The Depression makes it even more diﬃcult to
ﬁnance any deﬁcits, and as previously mentioned, the German government implements an
austerity policy (Br¨ ning cabinet). We have already discussed the reduced purchases of
u
goods and services in the previous section. The Br¨ning cabinet also cuts subsidies by 25
u
percent, but the share of government transfers in GNP continues to increase (see Table IV).
In order to balance the budget of the unemployment insurance system, beneﬁts are cut and
contribution rates are raised. Finally, in order to raise revenues a variety of income surtaxes
13

This short sketch of public ﬁnances relies heavily on James (1986) and Overy (1982). Unless otherwise
noted, numbers quoted are from James (1986).
14
The constructed tax rates are consistent with the tax rates in the model described below.

are introduced, but the basic income and corporation tax structure is not changed. The
cabinet also increases a variety of indirect taxes. Because the Reich reduces transfers to the
states, the states and municipalities start to increase local taxes. Our calculated implicit tax
rates in Table 4 reﬂect the higher income and sales taxes.15
In January 1933, Hitler is appointed Reich chancellor. In terms of economic policy,
the Hitler regime does not represent a radical break with past conservative policies, at
least until 1936.16 The Hitler government maintains the tax rate increases of the Br¨ning
u
government, which is reﬂected in Table IV. It also starts to implement some work programs
which were discussed in the Br¨ ning government. These work programs remain limited
u
because of continued concern about the inﬂationary impact of large deﬁcit ﬁnanced work
creation programs. As part of a takeover of the state and local governments, the Reich
government now enforces balanced budgets for state and municipal governments, and the
overall government budget deﬁcit as a fraction of GNP does not exceed 5 percent until 1935.
Some of the higher investment spending by the Reich then just replaces reduced state and
municipal investment, and large infrastructure programs, such as Autobahn construction,
never make up a large share of government spending. In fact total public spending on
roads (including autobahns) never much exceeds 6 percent of total government spending
(see Ritschl 1999a). On the other hand, rearmament quickly becomes an important part of
the government budget. Before 1935 military spending represents 20 percent of the Reich
15

A factor which plays an important role for the politics of post-World War I Germany, but which we
abstract from in our analysis are the reparation payments imposed in the Versailles Treaty. These reparation
payments contribute to the budgetary problems of the German government in the late 1920s. From 1925
to 1929 the share of reparation payments in total government spending increases from 6.5% to 9.7%, and
in 1929 reparation payments are 2.6% of nominal GNP (Ritschl 1999b). The Br¨ning government’s foreign
u
policy objective is the elimination of reparation payments, and it is succesful at that. Over the course of
the depression the share of reparation payments in nominal GNP declines to less than 1% in 1932, when
reparation payments are cancelled altogether at the Lausanne conference. We anticipate including these
eﬀects in our analysis of the growth model would have a small positive wealth eﬀect in the depression, which
would contribute somewhat to the observed downturn in labor input, output and investment, but it would
increase consumption.
16
The more radical economic measures of the Hitler regime are the dissolution of the unions, whose remains
are absorbed into the Nazi controlled German Labor Front, and a drastic enforcement of the system of price
and wage controls already started by the Br¨ning government. The use of price controls leads to signiﬁcant
u
quality reductions, especially for consumer goods. The turning point toward a state controlled economy is
the Four Year Plan of 1936-37, which reallocates resources from private industry to government controlled
steelworks.

budget, in 1935 that share is already 50 percent and the share then increases to 80 percent
by 1938 (see Ritschl 1999a). This increase of government spending is reﬂected in Tables III
and IV.

3. Analytical Framework
In this section we describe our framework for analyzing the Depression in Germany over the
period 1928 to 1937. The basis for our analysis is a standard neoclassical growth model with
government spending and distortionary taxes. To quantify the roles of productivity, ﬁscal
policy and real wages we study perfect foresight equilibria in this model under diﬀerent
assumptions. The experiments described in the following section share several common
assumptions and we outline what these are in this section. In particular, we describe how
we parameterize the model and describe the assumptions which deﬁne the baseline case that
serves as a reference point for the experiments.
3.1. The Model
The representative household has preferences over consumption, ct and leisure, 1 − nt ,
P∞

t=0

β t {ln ct + η ln (1 − nt )}, with η > 0, 0 < β < 1. Population grows at the rate µ ≥ 1

and all variables are in per capita terms. The household constraints are
(1 + τ e ) (ct + xt ) = (1 − τ i ) [wt nt + rt kt ] + st
t
t
µkt+1 = (1 − δ)kt + xt ,
ct , xt , nt , kt ≥ 0 and k0 given.
Here xt denotes purchases of investment goods, kt is the household’s beginning of period
stock of capital, wt is the wage, rt is the rental rate on capital, τ i is an income tax rate, τ e
t
t
is an expenditure tax rate, and st is a lump-sum transfer. Capital depreciates at the rate
0 < δ < 1. Capital income and labor income are taxed at the same rate, and capital income

is taxed gross of depreciation. The eﬀective income tax rate is then deﬁned by

1 − τt =

(1 − τ i )
t
.
(1 + τ e )
t

(1)

The homogenous output good, yt , is produced by competitive ﬁrms with a Cobb-Douglas
α
production function yt = At kt (γ t nt )1−α , where 0 < α < 1. Variations in the exogenous

variable At are due to policy changes that aﬀect the eﬃciency with which inputs are used to
produce output and γ ≥ 1 reﬂects the growth of useable knowledge.
Government spending gt does not provide any utility and is not productive. The government budget constraint is balanced period-by-period: gt + st = τ i [wt nt + rt kt ] + τ e (ct + xt ).
t
t
Finally, the aggregate resource constraint is yt = ct + xt + gt .
A time period represents a year and we set the time discount factor at β = 1/1.04. We
choose η such that the representative agent supplies one-third of the time endowment in the
labor market. In a competitive equilibrium, the Cobb-Douglas coeﬃcient 1 − α is equal to
the labor income share in GNP. For the time period 1925-1937 the labor income share varies
between 0.73 and 0.78, and we choose the mean over this period, that is 1 − α = 0.75. We
calculate the annual depreciation rate δ at 0.0122.17 We chose the long-run growth rate of
productivity as γ = 1.0187, the annual trend growth rate of per capita GNP in Germany,
1901-1913. We also allow for population growth at µ = 1.007, the average annual population
growth rate in Germany, 1925-1937.
3.2. The Baseline Case
We need to specify the initial conditions from which the economy starts, the public’s expectations of future ﬁscal policy, productivity, and real wages for the 1928-37 time period and
expectations for these variables after 1937. Since the initial conditions are to some extent
determined by the public’s expectations about the future, we start with a description of
these long-run expectations.
17

See the Appendix for the construction of the labor income share and the depreciation rate.

Long-run expectations We assume that long-run ﬁscal policy is determined by long-run
government spending. By this we mean that in the long-run government spending on goods
and services is a ﬁxed ratio of GNP, g/y = ω ∗ . Here an asterisk is used to denote the
detrended steady state value of the variable in question. Furthermore, transfers are such
that the after-tax value is a ﬁxed ratio of GNP, s/y = (1 + τ e ) σ ∗ . Finally, the long-run
eﬀective tax rate is such that the government budget constraint is satisﬁed, τ ∗ = ω ∗ + σ ∗ .
These assumptions on long-run ﬁscal policy imply that the net-of interest government budget
is balanced in the long-run. If we were to assume that at some point in time the government
uses a lump-sum tax to eliminate the outstanding government debt, it does not matter how
the government ﬁnances any interim deﬁcits, be it by lump-sum taxation or by issuing debt.
We set ω ∗ = 0.13 and σ ∗ = 0.10, which are the average values in Germany for the period
1925-28.18 We note that in the post-World War II German economy, the share of government
spending in the 1950s was around 15 percent. Only in the 1970s did this share increase to
20 percent. Finally, we also assume that in the long-run, productivity is on its trend A∗ = 1,
and real wages are market clearing
Initial conditions and transition expectations We assume that in 1928, TFP for the
German economy is on its long-run trend path, and the public expects the economy to stay
on this growth path so that Abase = 1 for t ≥ 1928. In 1928 the government spending share is
t
also at its long run value but the eﬀective tax rate is not (see Table IV). We assume that the
public expects that from 1929 on taxes will converge to their long-run value at a 10 precent
annual rate. More general, ﬁscal policy converges toward the long-run according to
ω t+1 − ω ∗ = 0.9 (ω t − ω ∗ ) , and τ t+1 − τ ∗ = 0.9 (τ t − τ ∗ ) .

(2)

Given the assumptions on the long run and the transition toward it, we now determine
18
Essentially we assume that private agents perceive the ﬁscal policy of the Nazi regime as temporary,
rather than permanent. To see how robust our results are, we have replicated the experiments discussed below
assuming a larger long-run government share, ω ∗ = 0.32, σ ∗ = 0.08 and τ ∗ = 0.4. Our main conclusions are
not aﬀected by this alternative parameterization.

the initial conditions in 1928. We set the 1928 capital stock such that we match the private
investment-GNP ratio in 1928 which is 0.13. This initial capital stock will be common to
all our experiments. We note that the investment-GNP ratio is quite stable from 1925 to
1928; it varies between 0.12 and 0.13. We also note that the initial capital stock is below its
steady state value. It would be of interest to account for this feature of the initial condition,
especially since we have observed in the previous section that the German economy was
below its long-run trend path for most of the interwar period.19 For the purposes of this
paper, however, we simply treat it as given. To complete the speciﬁcation of our baseline
case, we assume that real wages are market clearing from 1928 on.
The perfect foresight solution for the baseline speciﬁcation involves a steady-state transition with relatively small changes to the variables we are interested in. In particular, it
base
base
for t ≥ 1928. In
generates a time path for ﬁscal policy gt , τ base , and real wages wt
t

the following we will study the response of the growth model when we make alternative
assumptions for the path of exogenous variables based on the German economy from 19281937. We will judge the success of our framework in terms of how well it can account for the
following main features of the data: (1) employment and output collapse in the Depression,
but by the end of the recovery period are near their previous peaks, (2) private consumption
and investment both collapse in the Depression, but only investment shows a full recovery
afterward, and (3) real wages ﬁrst rise during the Depression and then fall in the recovery
period.

4. Findings
In this section we use our framework to analyze the contributions of productivity, ﬁscal
policy and high real wages to the Depression in Germany. To build our understanding of the
19

If we draw a linear trend line in Figure 2, we see that in 1928 GNP was about 20 percent below trend.
We can attribute this below par performance to a temporarily low productivity level and an oﬀ-steady state
capital stock. With these assumptions we set the initial productivity trend deviation and the capital stock
in 1928, such that we match the private investment-GNP ratio and the output trend deviation in 1928. We
also assume that productivity returns to trend according to (3). This choice of initial conditions does not
aﬀect the results from our experiments very much.

eﬀects at work in the model, we ﬁrst consider each factor in isolation. After this we combine
the factors in the same model to assess their overall contribution to the decline and recovery.
4.1. The Role of Productivity
In the Depression, detrended TFP falls by roughly 13 percent from the peak in 1928 to the
trough in 1932, and then recovers such that it exceeds its 1928 value by 16 percent (see Table I). The usual caveats about identifying the Solow residual with exogenous productivity
changes apply, in particular the decline of TFP may reﬂect unmeasured changes in factor
utilization. Nevertheless, productivity changes are a potential explanation for the Depression, and it is interesting to evaluate the contribution of productivity changes to these two
phases.
In this experiment, we isolate the eﬀect of TFP changes. We assume that real wages
base
are market clearing, and we keep ﬁscal policy ﬁxed at baseline values, that is gt = gt and

τ t = τ base , for t ≥ 1929. We assume that productivity trend deviations are given by
t
ln(At ) = ln(Aa ) − ln(Aa ) for t = 1929, ..., 1937, and
t
1928
ln (At ) = 0.9 ln (At−1 ) for t ≥ 1938,

(3)

where Aa denotes the productivity trend deviation for Germany in the years 1928-1937. For
the years after 1937 we assume that productivity trend deviations converge to their steady
state at a 10 percent annual rate.
The outcome of this experiment is shown in Figure 4. In this ﬁgure and the other ﬁgures
describing model experiments discussed below, the solid lines denote model predictions and
the dashed lines are actual data for Germany taken from Tables I and III. This case is
qualitatively quite successful at replicating the patterns of hours, output, investment and
consumption during the depression, but it fails on the real wage behavior. Output falls by
about 20 percent, about two-thirds of the actual drop.20 Hours fall by about 10 percent, a
20

This is consistent with the behavior of U.S. output predicted by the stochastic growth model analyzed

bit less than half the amount in the data. Investment falls dramatically in the model, much
as it does in the data. However the response is much more dramatic in the model as the
non-negativity constraint on investment becomes binding for four years. Consumption falls
6 percent by 1932, about a quarter of the actual decline. Some of the consumption decline
can be attributed to the binding non-negativity constraint on investment. Obviously, real
wages have to decline for this experiment, and they fall by about 11 percent, completely at
variance with the data. For the recovery phase, the main drawback of this experiment is
that the recovery is too strong; this applies especially to employment and consumption. By
a too strong recovery we mean that the model predicts all variables to be well above trend
at the end of the recovery phase, whereas this is certainly not true for the German economy
in 1937.
We conclude that the productivity changes which occurred during the 1928-1937 period,
if they are assumed to be entirely exogenous, can account for a substantial portion of the
Depression in terms of output, but do less well in explaining how hours, consumption and
investment behaved.
4.2. The Role of Fiscal Policy
We now study the joint eﬀects of the tax and spending policies under the assumption that
government policy after 1932 was not foreseen. This assumption prevents agents in the
growth model from adapting their choices long before any change in policy actually occurs
and is important for the results obtained. We discuss below where it makes a diﬀerence.
This experiment helps address two questions. First, to what extent did the policy of austerity (here, mostly increases in tax rates) contribute to the slump? Second, what was the
contribution to the expansion of the dramatic increase in government spending after 1932?
In this experiment, we isolate the eﬀects of changes in eﬀective tax rates and government
spending. We assume that real wages are market clearing, and productivity is on trend,
in Cole and Ohanian (1999).

At = 1 for t ≥ 1929. We assume that actual ﬁscal policy is as in Germany 1928-37,
a
a
base
gt = (gt /g1928 ) g1928 and τ t = τ a for t = 1929, ..., 1937
t

where g a is total government spending from Table III and τ a is the eﬀective tax rate from
Table IV. For t > 1937 ﬁscal policy is determined by (1). We assume that before 1933
the public does not anticipate the big increase in government spending from 1933 on. In
particular, for the years 1929-32 we assume that the public’s expectations about government
spending and tax rates g and τ are correct only up to 1932,
¯
¯
gt = gt and τ 29 = τ t for t = 1929, ..., 1932.
¯29
¯t
The public mistakenly anticipates a return to long-run ﬁscal policy from 1932 on according
to (1). From the year 1933 on we again assume perfect foresight on the part of the public
gt = gt and τ 33 = τ t for t ≥ 1933.
¯33
¯t
The results of this experiment are shown in Figure 5. Since the regime shift in 1933 is
unanticipated before then, the main impact of ﬁscal policy in the depression period is through
the increase in the eﬀective tax rate. This depresses employment by about 7 percent, output
by 5 percent and investment by 30 percent. Consumption is essentially unchanged. Since
the fall in employment is large relative to the decline in capital, real wages rise somewhat
although not as much as in the data.21 When 1933 arrives, the eﬀects of ﬁscal policy are
dominated by the large wealth eﬀect associated with the massive increase in government
spending. Taxes do not change much after 1932 and so have little additional impact over
this period. The negative wealth eﬀect causes a rebound in employment and investment
and consequently output as well. Since households feel poorer with the larger ﬁscal burden,
21

The magnitude of the employment response depends on the relatively high labor supply elasticity implied
by our parameterization. For a discussion of the quantitative importance of our assumption in the context
of the post-World War II U.S. economy, see Burnside, Eichenbaum and Fisher (2001).

consumption falls immediately in 1933 by about 5 percent, after which it stagnates. The
rapid recovery of employment translates into a fall in real wages in the early stages of the
recovery. If the Nazi regime were anticipated, that is, the entire path of taxes and spending
is foreseen as of 1928, we would then see very little of a decline or recovery in the model.
This is because the wealth eﬀect of higher spending would occur immediately and largely
oﬀset the depressing eﬀect of the high taxes.
We conclude that the impact of ﬁscal policy when the Nazi regime’s ﬁscal policy is unanticipated can account for roughly a quarter of the decline in hours and private expenditures
in the Depression, due essentially to the higher taxes. The unanticipated large increase in
government consumption after 1932 then explains about a third of the magnitude of the
recovery phase. However, this view of ﬁscal policy implies a much-too-rapid recovery, that
is, the model predicts a recovery within a year rather than over ﬁve years as observed for
the German economy.
4.3. The Role of ‘Too High’ Real Wages
Our observations on the labor market in Section 2.3 suggest that due to collective bargaining
arrangements real wages were “too high” to clear the labor market. The evidence on industry
nominal wages displayed in Figure 3 also suggests that the wage movements across industries
were quite similar. Because real wages increase in all industries, while aggregate labor
productivity declines, we believe it is reasonable to study the question of “too high” real
wages in the one-sector growth model.
In this experiment, we isolate the eﬀect of an exogenous change in real wages. We keep
base
and τ t = τ base , for t ≥ 1929, and
ﬁscal policy ﬁxed at baseline values, that is gt = gt
t

we assume that productivity is on trend, At = 1 for t ≥ 1929. For the years 1929-37 we
assume that wages follow the actual time path for real wages in Germany wa from Table I.
Employment is governed by labor demand subject to the constraint that workers are willing

to work at the going wage. For t = 1929, . . . , 1937
a
a
base
wt = (wt /w1928 ) w1928 ,

wt = At γ (1−α)t (1 − α) (kt /nt )α ,
η/ (1 − nt ) ≤ (1 − τ t ) wt /ct .
After 1937 real wages are assumed to be market clearing again.
Recall that real wages rise until 1931 after which they fall back slowly to their 1928
level. When we take this path of wages as given, the model conﬁrms that real wages are too
high for labor market clearing. The results shown in Figure 6 are quite dramatic. By 1932,
output falls by about 25 percent, employment falls by 35 percent, consumption falls by 10
percent, and investment falls to zero. However, even though real wages decline substantially
after 1931, the model generates only a small recovery in these variables, with the possible
exception of hours. Interestingly, while consumption recovers somewhat, it remains about 5
percent below trend in the recovery phase, roughly a quarter of the decline in consumption
in the data. The main drawback of this experiment then is that it fails to deliver a strong
recovery.
4.4. Combining the Eﬀects of Changes in Productivity, Fiscal Policy and Real
Wages
The previous results suggest that all three of these factor - productivity, ﬁscal policy and
high real wages - play quantitatively important roles in at least one phase of the Depression. However, these results could be misleading since they involve analyzing each factor in
isolation to the other factors. In this section we consider the implications of combining the
factors in the same model.
First, consider the case where we combine the eﬀects of changes in real wages and ﬁscal
policy in the same model. For this experiment we combine the assumptions for ﬁscal policy
in Section 4.2 and for real wages in Section 4.3. The results are displayed in Figure 7. This

experiment yields paths for output and employment that closely track the paths in the data,
except that the hours path falls a little too fast in the depression. Consumption falls by
about half the amount observed in the data, and investment falls by far too much. In the
recovery phase, the main success of this experiment is that consumption continues to remain
near its 1933 value, as in the data. The main failure here is that the recovery in investment
is too weak.
We now add changes in TFP to the experiment so all three factors are at work in the
model. This experiment adds the assumptions for productivity described in Section 4.1 to
those for the previous experiment. Figure 8 summarizes our ﬁndings. The combined eﬀects
of the three factors have a dramatic impact in the model. The model now has a sharp and
strong depression and robust recovery in hours, employment, consumption and investment.
The main problem from an empirical standpoint are the magnitudes of the changes in these
variables. Output and hours falls by about 60 percent. Consumption falls by more than 50
percent and investment collapses completely.
Taken together, we view these results as establishing that the changes in real wages,
productivity, and ﬁscal policy observed during the Depression in Germany account for much
of the observed macroeconomic dynamics. We think that much of the decline in productivity
was endogenous, indicating that the dramatic movements in the experiment which combines
all three factors are overstated. We conjecture that incorporating variable factor utilization
into the model, therefore endogenizing some of the decline in productivity, would lead to
results somewhere in between the experiment which combines real wages and ﬁscal policy
and the experiment which combines all three factors. If so, real wages and ﬁscal policy would
essentially explain the entire Depression in real per capita GNP. However, more work needs
to be done to conﬁrm whether the real factors we emphasize in this paper are genuinely
responsible. Speciﬁcally, the path of real wages needs to be explained and productivity
endogenized. In addition the state of the economy in 1928 was taken as given. We think
the Borchardt (1979) hypothesis that the causes of the depression lie in the pre-1928 period
deserves attention in future work as well.

Appendix
A.1 National Income Accounts for Germany
The national income accounts data (NIA) for Germany from 1925-1937 are from Ritschl (2001).
On the expenditure side they include GNP, private consumption, private ﬁxed investment in equipment and structures and inventory investment, exports and imports, and government purchases
of goods and services. Government spending does not include investment by the post oﬃce, the
national railway, and government-ﬁnanced residential investment. This investment is included in
private investment spending. Government investment includes public works and may include some
military construction activity. Military spending other than construction is supposed to be included
in government consumption. On the income side, the NIA series include indirect taxes, subsidies,
depreciation and net national income at factor cost. Real (that is, constant) mark series are in
1913 prices. The data for the calculation of government’s share in GNP and implicit tax rates are
also from Ritschl (2001). We use series on direct and indirect taxes, transfer payments, subsidies,
and contributions to social security and unemployment insurance. The population series and the
long-run GNP series 1901-1995 is from Ritschl and Spoerer (1997). The series are not adjusted for
territorial changes.
The standard source for German economic data is Hoﬀmann (1965). Ritschl (2001) is a recent
revision of the German NIA for the interwar period.22 For this time period reliable oﬃcial statistics
are not collected before the mid 1920s, and government budget obfuscations related to the Versailles reparation payments, and the Nazi rearmament program often make published oﬃcial data
doubtful. Most of the English literature reports Hoﬀmann’s (1965) data or relies on it for its own
estimates, e.g. Mitchell (1975) and Maddison (1995). The two data sets diﬀer somewhat in the
characterization of the depression. In Figure A.1 we graph the detrended per-capita GNP series for
Maddison (1995) and Ritschl (2001). Compared to Maddison (1995), Ritschl’s (2001) revised GNP
series shows a steeper decline in the depression and a faster recovery. For Ritschl (2001) there is a
signiﬁcant drop from the peak in 1928, whereas for Maddison (1995) GNP is essentially ﬂat from
1927 to 1929, after which it starts to drop signiﬁcantly. For both series GNP bottoms out in 1932,
with Maddison’s (1995) GNP slightly higher than Ritschl’s (2001) GNP. In the following we brieﬂy
describe Hoﬀmann’s (1965) and Ritschl’s (2001) construction of NIA statistics and point out the
diﬀerences between the two data sets. We use H for Hoﬀmann (1965) and R for Ritschl (2001).
The main diﬀerence between Hoﬀmann (1965) and Ritschl (2001) concerns the use of existing
oﬃcial statistics for the NIA.23 Ritschl (2001) starts with a revised estimate of net-national income
from the oﬃcial German statistics (o.s.), which he corrects for estimated interest payments on
government debt.24 Hoﬀmann (1965) on the other hand constructs net-national income at factor
cost from his own estimates of industry value-added. Ritschl (1998) argues that Hoﬀmann (1965)
uses a questionable estimate of value-added in the metal-processing industry, and that this accounts
for the diﬀerence between the oﬃcial statistics and Hoﬀmann (1965). Ritschl (2001) then constructs
gross-national product from net-national income and revised estimates of indirect taxes, subsidies,
and depreciation from oﬃcial statistics. Hoﬀmann (1965) does not construct a gross national
product series, but he does construct a series for net-national income at market prices based on
expenditure components.
22

For the pre-1913 time period Fremdling (1995) argues that Hoﬀmann’s (1965) income numbers are biased
downward.
23
Earlier versions of the revised NIA in Ritschl (2001) have appeared in Ritschl and Spoerer (1997) and
Ritschl (1998).
24
The oﬃcial statistics for net-national income are based on income tax statistics.

The expenditure components are investment (public and private), consumption (public and
private), and the balance of payments. For private investment, Hoﬀmann (1965) and Ritschl
(2001) diﬀer for the years after 1935: H extrapolates overall investment based on manufacturing
investment, whereas R uses unpublished o.s. on investment. For public investment Hoﬀmann
(1965) uses data from public budgets, whereas Ritschl (2001) uses the o.s. on public investment.
The main problems for public consumption relate to (1) the conversion of original German public
budget balance sheet data to numbers consistent with NIA concepts; (2) the accounting for interest
payment on public debt; and (3) budgetary manipulations related to reparations payments in
1920s and rearmament in 1930s. Ritschl (2001) and Hoﬀmann (1965) obtain the same estimates
of public consumption for the 1920s and early 1930s, but R ﬁnds a smaller increase of public
consumption from 1934 to 1937, and only from 1938 on are the numbers of R and H roughly the
same. For the balance of payments Hoﬀmann (1965) extrapolates the current account from the
capital account, whereas Ritschl (2001) use unpublished reports on balance of trade data. The
estimates of Hoﬀmann (1965) and Ritschl (2001) for the balance of payments diﬀer for the years
after 1935, and Ritschl (1998) states that this is due to H’s use of import and export price deﬂators
which are very diﬀerent from the ones published in the oﬃcial trade statistics. Finally Hoﬀmann
(1965) estimates private consumption based on the production of consumer goods and assumes
that from the 1930s on private and public consumption are proportional. Given the enormous shift
toward public expenditures on goods and services in the 1930s this appears to be a questionable
assumption. Ritschl (2001) does not provide an independent estimate of private consumption, but
calculates it as the residual of production minus other expenditure components, and ﬁnds that the
estimate of private consumption does not increase as fast as H’s estimate in the 1930s.
All real variables are in 1913 prices. Ritschl (2001) uses separate price indexes for private
consumption, public consumption, equipment investment, construction, and imports and exports
to deﬂate each expenditure category. Most of these price indices come from oﬃcial statistics. The
only exception to this procedure is inventory investment, which is not deﬂated at all. Ritschl
(2001) calculates GNP in constant prices as the sum of the constant price expenditure components.
Because inventory investment is not deﬂated, Ritschl (2001) underestimates the fall of real GNP
in the depression, since inventory reduction is substantial in the depression years of 30-32, and at
the same time prices of ﬁnished manufactured goods fall substantially.
A ﬁnal problem is associated with the fact that the territorial coverage of Germany changes
repeatedly in the 20-th century, even in the short period we study. In 1935 Hitler reclaims the
Saarland, which became a League of Nations protectorate after WWI, and in 1938 Germany annexes
Austria. All available series are for the relevant boundaries of Germany at the time, that is they
include the Saarland from 1935 on and they include Austria in 1938, but not before. The addition
of the Saarland does not create a big problem since it is relatively small, the Saarland’s population
is 1.8% of the Reich population. The annexation of Austria does have a signiﬁcant eﬀect on the
NIAs of the German Reich, since Austria is relatively large: its population is about 10% of the
Reich. There are no oﬃcial estimates of 1938 GNP for the German Reich in its 1937 boundaries.
Available estimates of German GNP are based on an estimate of nominal Net-Factorincome done
by the U.S. Strategic Bombing Survey (USSBS), see Ritschl and Spoerer (1997). Rather than
using these estimates we have decided to focus on the 1928-38 period. At this point we just want
to point out that, if we extrapolate GNP from 1937 to 1938, using the USSBS estimates for NetFactorincome, we ﬁnd that detrended per-capita real GNP falls from 1937 to 1938. This appears to
be inconsistent with Maddison (1991), who estimates 1938 per capita GNP in Austria to be higher
than in Germany.

A.2 Employment, Hours Worked, and Wages
For the construction of the labor income share, we use data on wages and salaries, proprietors’
income in forestry and agriculture, and proprietors’ income in manufacturing and trades from Bry
(1960), p. 122. We also include employer contributions to social security from Ritschl (2001) in
labor income. We assume that 90 percent of proprietors’ income in forestry and agriculture is labor
income. We assume that in trade and industry, the share of labor income in proprietors’ income is
the same as the labor income share for the economy as a whole. We calculate the share of labor
income in GNP net of indirect taxes minus transfers.
Our series on aggregate and industry employment and nominal wages are from L¨lh¨ﬀel (1974),
o o
who provides information on annual industry employment, average hours worked, and unit labor
cost. Annual unit labor cost includes wages, payments in kind, employer contributions to social
security and UI, and payroll tax contributions. The quality of data is very uneven across industries,
and for some industries relies heavily on interpolation. The data for manufacturing appear to
be the most reliable ones. In this industry employment and unit labor cost are based on data
from trade associations (‘Berufsgenossenschaften’). A trade association provides employees with
accident insurance coverage, and the insurance contributions are based on wage income. Average
hours worked is based on industry surveys. On the other extreme is the Agriculture sector where
employment is interpolated between census dates, hours worked is based on tariﬀ agreements, and
unit labor costs are based in part on oﬃcial statistics for farm operating costs. The measurement
problem for agriculture is further complicated by the big contribution of unpaid family members.
To evaluate L¨lh¨ﬀel’s (1974) data we consider alternative employment and wage series.
o o
We consider alternative employment series by Ritschl (1990) and Hoﬀmann (1965). Ritschl
(1990) calculates employment from the oﬃcial statistics and statistics of the private ‘Institut
f¨r Konjunkturforschung’ (IfK).25 Both sets of statistics are based on membership data from the
u
(mandatory) health insurance system (‘Ortskrankenkassen’). Ritschl (1990) estimates total hours
worked as the employment series times the average hours worked index series from Hoﬀmann (1965).
We follow Ritschl (1990) and calculate the average wage rate as wage and salary income plus employer contributions to social security and unemployment insurance from NIA data, divided by
the measure of hours worked. The hours worked and wage series of Ritschl (1990) are much more
volatile than the corresponding series from L¨lh¨ﬀel (1974). This is mainly due to the substantial
o o
movements in Ritschl’s (1990) employment series in the depression: his series declines much more
than does aggregate employment for either Hoﬀmann (1965) or L¨lh¨ﬀel (1974). We suspect that
o o
Ritschl’s (1990) series covers mostly the industrial sector, and does not cover the agricultural sector
which contains about 30 percent of employment.
The second alternative employment series is based on information in Hoﬀmann (1965). We
calculate total hours worked as the sum of average hours worked weighted industry employment.
Industry employment is from Hoﬀmann (1965, p.204-206, Table 20). Since Hoﬀmann’s (1965,
p.213-214, Table 26), average hours worked series applies only to manufacturing and mining, we
use the 1925-38 average of the average hours worked series for all other industries. Clearly this
underestimates the variability of total hours worked. In Table A.1 we display all three employment
series. Our baseline employment series, L¨lh¨ﬀel (1974), shows about the same decline as the series
o o
constructed from Hoﬀmann (1965), and much less of a decline than the series from Ritschl (1990).
Given that the estimate based on Hoﬀmann (1965) probably underestimates total hours variability,
we consider our baseline employment series a conservative estimate of the employment decline in
Germany’s Depression.
25

The same series is used in Broadberry and Ritschl (1995).

We also consider two alternative wage series. The ﬁrst is an aggregate wages series, where we
divide the nominal wage bill constructed above with Ritschl’s (1990) employment series. For the
second series we use Bry’s (1960, p.331, Table A-2) estimates of eﬀective average hourly earnings.
Bry’s (1960) wages are supposed to include variations in average weekly hours worked, overtime,
overtime rates, etc. Apparently they do not include employer contributions to social security, and
payroll taxes. Furthermore the coverage appears to be limited to manufacturing. In Table A.2
we display all three wage series deﬂated by the common price index of ﬁnished manufactures from
Bry (1960). Our baseline real wage series, L¨lh¨ﬀel (1974), and the series based on Ritschl (1990)
o o
display a similar pattern, with Ritschl (1990) increasing somewhat more than our baseline series in
the Depression. Only Bry (1960) displays a decline of real wages in the Depression.
A.3 Prices and Money
The cost of living price index and the wholesale price index for ﬁnished manufactures is from
Bry (1960), p. 255. The implicit GNP deﬂator is calculated from Ritschl (2001). The series for M1
includes currency in circulation plus demand and time deposits held by the non-bank public and
is from Bundesbank (1976), p. 4, Table 1.01.
A.4 Capital Stock
Our measure of the capital stock includes private capital and some government capital, such as
government-provided housing, the post oﬃce, and the national railway. Our capital stock measure
does not include infrastructure capital derived from government investment in buildings and works
(including roads). We construct capital stocks based on the perpetual inventory method with
geometric depreciation. Gehrig (1961) argues that the annual geometric depreciation rate for
structures is 0.32 percent. We estimate the annual geometric depreciation for equipment to be 3.16
percent based on Gehrig’s (1961) series for equipment capital and investment. We then use these
depreciation rates, Ritschl’s (2001) series for private investment on equipment and structures, and
Gehrig’s (1961) estimates of the capital stock in 1929, in order to construct capital stock series for
equipment and structures. Since Gehrig’s (1961) 1929 capital stock estimate for structures includes
public capital, we adjust his estimate based on Hoﬀmann’s (1965) estimate of public capital in
1929. Total capital is the sum of equipment and structures.
A.5 U.S. Data
We use annual estimates of the population, 16 and over, Series A39 from U.S. Department
of Commerce (1975). Output is GNP in billions of 1987 dollars, Table 1.1, Line 1 from U.S.
Department of Commerce (1993).

References
[1] Borchardt, K. (1979). “Zwangslagen und Handlungsspielr¨ume in der großen Wirtschaftskrise
a
der fr¨hen dreißiger Jahre: Zur Revision des uberlieferten Geschichtsbildes,” in Jahrbuch der
u
¨
Bayerischen Akademie der Wissenschaften, 85-132. Reprinted as “Constraints and Room for
Manoeuvre in the Great Depression of the Early Thirties: Towards a Revision of the Received
Historical Picture,” in Borchardt, K. (1991). Perspectives on Modern German Economic History and Policy, Cambridge: Cambridge Univ. Press.
[2] Broadberry, S.N. and Ritschl A. (1995). “Real Wages, Productivity, and Unemployment in
Britain and Germany during the 1920s,” Explorations in Economic History 32, 327-349.
[3] Bry, G. (1960). Wages in Germany 1871-1945, Princeton: Princeton Univ. Press.
[4] Deutsche Bundesbank (1976). Deutsches Geld und Bankwesen in Zahlen, 1876-1975, Frankfurt
am Main: Verlag Fritz Knapp.
[5] Burnside, C., Eichenbaum, M., and Fisher, J. (2001). “Assessing the Eﬀects of Fiscal Shocks,”
Northwestern University, mimeo.
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1957),” IFO-Studien 7, 7-60.
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Wirtschaft seit der Mitte des 19. Jahrhunderts. Heidelberg: Springer Verlag.
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Arbeitskosten und Arbeitsstunden (1925 bis 1938 und 1950 bis 1967),” IFO-Studien 20 (1/2),
33-150.
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View, Oxford: Oxford Univ. Press.
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[18] Ritschl, A. (1999a). “Deﬁcit Spending in the Nazi Recovery, 1933-1938: A Critical Reassessment.”
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Lessons from Sovereign Debt Theory.”
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Holtfrerichs Berechnungen zur Lohnposition der Arbeiterschaft 1925-1932,” Geschichte und
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the United States. Vol.1, 1929-58.
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States. Colonial Times to 1970. Part 1.

Table I
Production and the Real Wage, 1928-1937

Year
1929
1930
1931
1932
1933
1934
1935
1936
1937

Output
95.9
87.1
74.9
67.8
71.1
77.7
83.4
90.8
98.2

Capital
Stock
98.9
97.4
95.2
92.8
90.6
88.8
87.3
86.2
85.5

Labor
99.3
93.3
82.5
74.1
76.2
84.2
84.5
87.5
89.8

Labor
Productivity
96.6
93.4
90.7
91.5
93.3
92.2
98.7
103.7
109.3

TFP
96.7
92.4
87.5
86.5
89.4
90.9
98.2
104.4
111.0

Real Wage
104.6
109.8
111.3
109.5
106.8
104.2
103.2
102.2
100.6

Note: Output is real GNP from Ritschl (2001). The construction of the capital stock series is
described in the appendix. Labor is total hours worked from L¨lh¨ﬀel (1974). Labor productivity
o o
is output per hour worked. The calculation of TFP is described in Section 2.2. Real wages
are nominal wages from L¨lh¨ﬀel (1974) deﬂated with the price index for ﬁnished manufactured
o o
goods from Bry (1960). All variables except the real wage are per capita. Output, capital, labor
productivity, TFP and real wages are detrended with the per capita real GNP trend growth rate.
All series are normalized to 100 in 1928. Bold indicates the year of the trough in real per capita
GNP.

Table II
Prices and the Money Supply, 1928-1937

Year
1929
1930
1931
1932
1933
1934
1935
1936
1937

Finished Goods
99.3
94.7
85.9
74.3
71.1
73.0
75.3
76.4
78.6

Price Index
Cost of Living
101.3
97.4
89.5
79.6
77.6
79.6
80.9
81.6
82.2

M1
GNP Deﬂator
101.8
101.5
101.3
95.2
95.5
80.7
84.3
72.8
80.5
74.2
80.9
80.0
80.6
89.4
80.3
96.6
81.0
104.2

Note: The cost of living price index and the wholesale price index for ﬁnished manufactures is from
Bry (1960); the implicit GNP deﬂator is from Ritschl (2001); M1 is currency in the non-banking
sector plus demand and time deposits from Bundesbank (1976). All time series are normalized to
100 in 1928, but not detrended. Bold indicates the year of the trough in real per capita GNP.

Table III
GNP Expenditure Components, 1928-1937

Year
1929
1930
1931
1932
1933
1934
1935
1936
1937

G
105.7
93.5
83.1
86.0
101.2
136.4
148.2
163.7
205.7

Panel A: Detrended
GX
C
GC
108.5
95.6 95.6
98.3
75.9 93.6
90.0
57.7 86.5
95.5
51.1 80.2
110.2
68.1 76.1
137.1
133.7 76.5
131.1
210.9 77.3
147.2
224.3 79.9
195.8
242.1 81.6

Year
1928
1929
1930
1931
1932
1933
1934
1935
1936
1937

G
0.12
0.14
0.13
0.14
0.16
0.18
0.22
0.22
0.22
0.26

GC
0.10
0.11
0.11
0.12
0.14
0.15
0.17
0.15
0.16
0.20

Levels,
X
80.6
41.6
5.4
11.1
36.4
55.2
66.9
80.2
90.8

1928 = 100
XFIX
XINV
90.1
26.8
71.2
-126.6
45.5
-222.5
31.6 -105.6
37.6
29.9
52.7
69.9
64.8
79.1
78.8
88.3
89.9
96.4

Panel B: Shares in GNP
GX
C
X
XFIX
0.03 0.75 0.15 0.13
0.03 0.75 0.13 0.12
0.02 0.81 0.07 0.10
0.02 0.87 0.01 0.08
0.02 0.89 0.02 0.06
0.03 0.81 0.08 0.07
0.05 0.74 0.11 0.09
0.07 0.70 0.12 0.10
0.07 0.66 0.13 0.11
0.07 0.63 0.14 0.12

XINV
0.02
0.01
-0.03
-0.07
-0.04
0.01
0.02
0.02
0.02
0.02

Ex
110.1
101.1
90.0
63.3
55.5
51.1
52.7
61.8
70.7

Im
101.7
92.9
84.5
79.0
69.1
70.2
62.3
62.4
73.8

Ex
0.17
0.20
0.20
0.21
0.16
0.13
0.11
0.11
0.12
0.12

Im
0.20
0.21
0.22
0.23
0.24
0.20
0.18
0.15
0.14
0.15

Note: Total government purchases of goods and services (G) and its components government
consumption (GC ) and investment (GX ), private consumption (C), total private investment (X)
and its components private ﬁxed investment (XFIX ) and inventory investment (XINV ), exports
(Ex), and imports (Im) are from Ritschl (2001) and described in the Appendix. All variables are
real per capita, detrended with the per capita real GNP trend growth rate, and levels are normalized
to 100 in 1928. Bold indicates the year of the trough in real per capita GNP.

Table IV
Fiscal Policy, 1928-1937

Year
1928
1929
1930
1931
1932
1933
1934
1935
1936
1937

Government Spending
as a fraction of GNP
Total
G
Tr
0.23 0.13
0.11
0.25 0.14
0.12
0.27 0.13
0.14
0.29 0.13
0.16
0.33 0.15
0.18
0.33 0.17
0.16
0.34 0.20
0.14
0.33 0.21
0.12
0.32 0.21
0.11
0.35 0.25
0.10

Implicit Tax
τi
τe
0.12 0.13
0.12 0.13
0.13 0.13
0.14 0.15
0.13 0.17
0.13 0.16
0.13 0.15
0.13 0.15
0.14 0.14
0.16 0.14

Rates
τ
0.21
0.22
0.23
0.25
0.26
0.25
0.24
0.24
0.25
0.26

Note: Nominal purchases of goods and services (G), transfer payments (Tr) and GNP are from
Ritschl (2001). We have not included reparations and interest on government debt. The calculation
of the implicit income tax rate τ i and sales tax rate τ e is described in the text, and the eﬀective
tax rate τ is based on (1). Bold indicates the year of the trough in real per capita GNP.

Figure 1
Output in Germany and the United States during the Depression
100

70
Germany
65
US

60
-2

-1

Note: Output is per capita real GNP for Germany 1926-37 and the United States 1927-38. Each
series is detrended with its respective long-run average growth rate, and normalized to 100 at the
peak. The peak year 0 is 1928 for Germany and 1929 for the United States. The trend growth
rate for Germany is 1.87% and the trend growth rate for the United States from 1901-94 is 1.90%.
Sources: Ritschl (2001) and Ritschl and Spoerer (1997) for Germany and U.S. Department of
Commerce (1975, 1993) for United States.

Figure 2
Output in Germany and the United States, 1901-1993

1 0

9 .6

9 .2

8 .8

8 .4

G e rm a n y
8
U S

7 .6
191 0

1920

1930

1940

1950

196 0

1970

1980

Note: Log-level of real per capita GNP, see Figure 1.

19 90

Figure 3
Industry co-movement of nominal wages, 1928-1937

120

110

100

A g ric u ltu re
E n e r g y / M in in g
M a n u fa c tu rin g
C o n s tr u c tio n

T ra d e
T r a n s p o r ta tio n
60
1928

1929

1930

1931

1932

1933

1934

1935

1936

1937

Note: Industry nominal unit labor cost from L¨lh¨ﬀel (1974), not detrended, normalized
o o
1928=100.

Figure 4
The eﬀects of a decline in TFP
Hours

Output

100

105
100

95
90

90
85

80
80
75
1928

75
70
1930

1932

1934

1936

1928

1930

Consumption

1932

1934

1936

Investment

120

100

80
90
60
85

1928

1930

1932

1934

0
1928

1936

1930

1932

1934

Wages
110

105

Model

100

Data

90
1928

1930

1932

1934

1936

Figure 5
The eﬀects of an unanticipated change in ﬁscal policy

Hours

Output
105

100

95
90

85
85

80
75
1928

75
70
1930

1932

1934

1936

1928

1930

Consumption

1932

1934

1936

Investment

100

140
120

100
90

80
60

40
80
20
1928

1930

1932

1934

1936

1928

1930

1932

1934

Wages
110
Model

108
106

Data

104
102
100
1928

1930

1932

1934

1936

Figure 6
The eﬀects of “too high” real wages

Hours

Output

100

75
75
70
70
1928

1930

1932

1934

1936

1928

1930

Consumption

1932

1934

1936

Investment

100

1928

1930

1932

1934

0
1928

1936

1930

1932

1934

Wages
110
Model

108
106

Data

104
102
100
1928

1930

1932

1934

1936

Figure 7
Combining the eﬀects of “too high” real wages and ﬁscal policy

Hours

Output

100

80
80
75
75
70
70
65
1928

1930

1932

1934

1936

1928

1930

Consumption

1932

1934

1936

Investment

100

1928

1930

1932

1934

0
1928

1936

1930

1932

1934

Wages
110
Model

108
106

Data

104
102
100
1928

1930

1932

1934

1936

Figure 8
Combining the eﬀects of “too high” real wages, ﬁscal policy, and TFP

Hours

Output

120

110

100

40
1928

1930

1932

1934

40
1928

1936

1930

Consumption

1932

1934

1936

Investment

100

120

100

40
20

50
1928

1930

1932

1934

0
1928

1936

1930

1932

1934

Wages
110
Model

108
106

Data

104
102
100
1928

1930

1932

1934

1936

Table A.I
Alternative Measures of Employment

Year
1929
1930
1931
1932
1933
1934
1935
1936
1937

L¨lh¨ﬀel
o o
(1974)
99.3
93.3
82.5
74.1
76.2
84.2
84.5
87.5
89.8

Ritschl
(1990)
95.8
88.9
76.2
66.5
67.3
76.8
82.0
89.3
97.0

Hoﬀmann
(1965)
96.1
88.8
80.7
74.3
76.2
83.1
84.6
89.2
93.2

Note: The series are described in the Appendix. All series are per capita and normalized to 100 in
1928.

Table A.II
Alternative Measures of Real Wages

Year
1929
1930
1931
1932
1933
1934
1935
1936
1937

L¨lh¨ﬀel
o o
(1974)
104.6
109.8
111.3
109.5
106.8
104.2
103.2
102.2
100.6

Ritschl
(1990)
103.2
103.8
110.7
109.4
112.4
107.6
105.0
102.1
99.8

Bry
(1960)
104.1
103.9
104.4
99.3
98.5
96.7
93.3
92.1
89.6

Note: The nominal wage series are described in the Appendix. All series are deﬂated with the
wholesale price index for ﬁnished manufactures from Bry (1960). The real wages are then detrended
with the per capita GNP trend growth rate, and they are normalized to 100 in 1928.

Figure A.1
Two Measures of German Output During the Depression, 1925-1938

1 0 5 .0 0

1 0 0 .0 0

9 5 .0 0

Index

9 0 .0 0

8 5 .0 0

8 0 .0 0

7 5 .0 0
R it s c h l
7 0 .0 0
M a d d is o n

6 5 .0 0
1925

1927

1929

1931

1933

1935

1937

Note: Output is per-capita real GNP for Germany 1925-38 detrended with the long-run average
growth rate and normalized to 100 in 1928, see Figure 1. The sources are Ritschl (2001) for the
line labeled Ritschl, and Maddison (1995) for the line labeled Maddison.

Full text of Working Papers (Federal Reserve Bank of Chicago) : The Role of Real Wages, Productivity and Fiscal Policy in Germany's Great Depression 1928-1937, Working Paper 2001-07

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