The causes of unemployment in interwar Australia

Abstract

This paper examines the factors contributing to unemployment in Australia during the Great Depression of the 1930s. Previous writers have emphasised the role of demand-side variables but it has also been argued that excessive real wages caused unemployment. The Layard-Nickell model, developed originally for the postwar British economy, is applied to Australian data. The empirical results confirm that demand shocks in the form of changes in government spending and in the terms of trade were important in both downturn and recovery. Wage indexation resulted in some rigidity of real wages but this was not a major cause of unemployment.