1 Unemployment in Weimar Germany January 2004

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