Labor Market Policies in a Deep Recession: Lessons from Hoover's Policies during the U.S. Great Depression.

What are the effects of labor market policies when the economy is sliding into a deep recession? We show that public announcements asking firms not to cut wages under H. Hoover during 1929–33 postponed entering the zero lower bound episode and reduced its duration. We develop and estimate a medium scale New Keynesian model to measure the effect of Hoover policies during the Great Depression and we find evidence that without such polices the U.S. economy would have ended up in a liquidity trap 3 years before it actually did, suffering an even deeper recession with a larger deflation. [ABSTRACT FROM AUTHOR]