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What role did unemployment benefits, structural change and real wages play in
causing unemployment/ was it inevitable?
Introduction
Glynn and Booth (1983) note that even at the peak of the cycle, the unemployment rate rarely went below 8%, roughly
twice the pre-war rate
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Real wages and structural change go farther at explaining high interwar unemployment than unemployment benefits however, there is also a role for demand side factors, in particular the decision to return to gold, which Eichengreen
(1995) berates in 'Golden Fetters’
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Beenstock et el
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Shocks to Aggregate Supply: Real Wages and Labour Productivity
Dowie (1975) finds that the critical change in the 1920s was the fall in the workweek from 54 -> 47 hours (13% fall),
which coincides with a sharp increase the real wage
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Beenstock et al
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This explanation is given in spite of evidence from Broadberry (1983) that the supply of labour was very inelastic,
and econometric evidence from Dimsdale (1984) which supports this
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(1984) completely, arguing that real wages were not the problem in
interwar period as real product wage never really got out of line with labour productivity
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Real wage set by insider negotiations with trade union - this meant that long term unemployed were unable to price
themselves back in to the market, which kept the natural rate of unemployment high as a result
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They argue that a high replacement ratio (unemployment benefits relative to wages) induced voluntary unemployment
(leisure and job search); which is consistent with Alchian's (1969) theory of ‘search unemployment’,
which posits that people become unemployed as a low-cost means of generating information about the highest value
use of their labour services
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Their results have attracted criticism from Ormerod and Worswick (1982), however, who believed the sample period
to be inconsistent with the causality notion which B&K apply to benefits
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Craft’s (1987) evidence contradicts this, finding that the longer you are unemployed, the less likely you are to leave
unemployment;
which he attributes to psychological changes, loss of skills and adverse signals to employers - resulting in transitional
unemployment becoming structural through of process of hysteresis
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He also makes the distinction that the unemployment rate for household heads was 8
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He paints a more reasonable picture of interwar labour markets: that if there as voluntary unemployment, it was not
among household heads, but rather secondary workers, such as young males living at home
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Workers lost their jobs in old, labour-intensive staples and were not re-employed in new capital intensive industries,
creating transitional unemployment which led to hysteresis
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5 in old staples
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Powerful unions inhibited new technology in shipbuilding and car manufacture - meaning it was not just a process of
adjustment, but rather resistance to change
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They observe that the regional locations of many industries (e
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Capie and Webber (1985) note that tight monetary policy was required in order to return to gold at prewar parity
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The return to gold in 1925 worsened the unemployment situation
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Thomas (1994) estimates that a 10% devaluation would have reduced unemployment in 1928 from 8% to 5%, yet
this was not viable, as Britain was bound to the fixed exchange rate monetary system
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Ormerod and Worswick (1982) believed Benjamin and Kochin’s (1979) time series equation to be unstable with
respect to their sample period; as the benefits increase occurred after a sharp rise in unemployment during 1920/21
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