Notesale: Turn your study into money

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Unemployment in the interwar period
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Estimates from unemployment insurance indicate and unemployment rate of around 14%
However this doesn’t cover sectors like civil servants and farmers who are less likely to be
unemployed, Feinstein refines this figure to around 11% for the whole economy
A step increase on the pre-war unemployment level in the 1920s and again in the 1930s
Long term unemployment far more common in 1930’s than the 1920’s

Real wages
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Real wage increase at the start of the 1920’s contributed to the recession of 1920/1921
A fall in working hours of 13% was negotiated by trade unions with no fall in the nominal
wage (54 to 47 hours)
Led to a 13% rise in the real wage initially
Employees may have wanted this as rationing in the war led to build up in savings, causing
them to substitute work for leisure in the period following the war
Firms probably accepted due to expected high inflation
Return to gold=deflationary policy+ high interest, real wages rise
Broadberry see’s productivity gap in all of inter war – leads to unemployment as firms costs
are relatively much higher
Solomou-Brdbrry used wrong measure for prices index- RPI – not representative of firm’s
costs, only of consumers, analyses with GDP deflator instead, finds real wage gap disappears
by 1922
So cause of peak but not the persistence
Could also be due to the profit rate fall – π/k=π/y*y/K – fall in profit share of income as
labourers bargain for higher wages due to falling prices and strong unions-lowers
profit/capital ratio – less investment in future- less jobs over inter war period
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This would also have led to a falling profit rate – not just real
wage cause
Beenstock + Warburton argue that real wages were the cause of ¾ of job losses in interwar
period saying it rose even into the late 30’s –believe real wage rose 18% 1920-38
Dimsdale et al
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5 in old

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Mathews, Feinstein and Odlingsmee find TFP growth was very unimpressive for the interwar
period
Hatton notes that there was a lot of unemployment in the staple industries and in the North
and Wales, where those industries were concentrated
Also lots of unskilled and old people unemployed in these areas/industries – labour
immobility?
Therefore it seems likely that the decline of these industries mixed with the immobility of
labour did mean that a lot of the cause of the step increase in unemployment was in fact
structural change

Long term unemployment
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Possible that there was a hysteresis effect from long term unemployment in 1930’s
Lots of workers displaced from the 1929/32 depression
World trade hit heaviy-US-capitalflows-primary producers-40% UK exports-staple industries
These staple industries had to lay workers off
Tended to be older men and in industrial areas
1937-London -8% unemployed 12 months or more, 40% in wales/the North
benefits as a possibly cause of ltu-reject, over half below poverty line, 10% ratio greater than
0
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5%
Mobilization for war effort ended this

Hatton looked into the numbers unemployed and constructed his hatton curve
this curve showed the probability of being rehired after different durations of
unemployment – ministry of labour data
the length of unemployment rose drastically – 20% of those unemployed<3months still
unemployed after 3 more, 80% of those unemployed 9-12 months still unemployed within a
year
probability of finding employment within a week fell from a half after 1 week to 1/50 after
52
chance of employment fell dramatically with duration
likely that duration used as screening process by firms
possible that this was simply allocation where workers with better skills and higher
productivity hired first, rest not hired, so it looks like long term hysteresis effet – would have

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to look at individuals chance over time – heterogeneity of workers, employees sorting out
least efficient
hwvr, the Unemployment Assistance Board had a quota of long term unemployed who were
temporarily hired, prospects of employment greatly improved afterwards – suggests that
this was not all efficient screening

insider-outsider theory
explain model – could be explanation for persistence
long term unemployed definitely outsiders – can’t effect real wage, can’t be priced back in –
forced to remain outsiders
union workers threaten strikes or fall in effort/disruptions if outsiders hired
crafts – ran a regression of effect of long term and short term unemployment on real wage
long term – stock, short term- flow
found that long term unemployment not able to force wage down- 1% increase in long term
would actually raise the real wage
strong evidence for insider outsider theory
may have been willing to work for lower wages but couldn’t

Trade unions
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Unionisation increased up to the 1920s, especially WW1
Could be argued this caused nominal wage rigidity and therefore is responsible for some of
the unemployment
Membership peaked at around 8 million in 1921
Resulted in a more institutionalised wage setting
The basic wage was determined for the whole industries in many industries
Only coal had this before WW1
Trade boards were also set up-1918-minimum wage for industries with a lot of wage
flexibility/hard to organise or very low wages
It’s estimated that collective agreements covered some ¾ of the labour force
Wartime government set the trend of collective bargaining in post war period – set up
systems such as the whitley system to accommodate collective bargaining

Centralisation
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It has been argued by some that the wage setting process was not centralised enough which
lead to high unemployment
If wage setting is only done on a firm wide or local level, unions account for the highly elastic
demand for labour, a small wage increase though wage bargaining could result in firms
looking else where for workers
Equally, setting the wage at an economy wide level will result in unions accounting for the
negative effects on total unemployment of too high a real wage set, they will account for the
unemployed
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4 for interwar period and as high as 0
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6% - argue that therefore these women were never looking for work
Juveniles- more likely that they were made unemployed when older due to higher wage
costs-not voluntary- wages also rose with benefits-no huge increase in ratio – so not
voluntary
Women – far more likely that married unemployed women no longer registered as there
was no longer any incentive to do so, doesn’t mean they weren’t still looking for
employment -hatton
Ran a regression of unemployment level on benefit-wage ratio and output gap
Used logQ - logQ*
Found B/W coefficient to be 18, output gap coefficient to be -90, both statistically significant
Argue therefore that there was a clear effect of B/W on unemployment
Believe that if replacement ratio had remain at 0
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No economic theory to back it up
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Likely to be an overestimation as most claimers will not have 3 dependants- also
used a wage index which included women and children, so likely to overestimate
replacement ratio – women and children not in their benefit – believs replacement ratio
closer to 0
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4 replacement ratio – also believe that
there would be a lot of vacancies if their argument is correct as people more willing to take
time to search for and consider jobs as well as more likely to leave jobs – 95% of vacancies
went within 1 week – little evidence

Collins – replacement ratios very different in different industries – disaggregated by industry and reran their model – 9 of 12 showed no significant relationship – includes coal, cotton and shipbuilding
– where unemployment was very high



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