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Horell, Interwar Unemployment

We want to explain the shocks and the structural change that occurs afterwards.

1.      Supply

Wage rigidity and different bargaining structure.

Quite  a lot of long-term unemployment. Insider-outsider theories (peoples outside employment cannot affect the wagerate). Also hystereses (low probability of being reemploymed)

Group of high turnover unemployment. People are looking for new jobs and take some time off between. Benefits increased, so people can afford to take time off.

2.      Demand

The simple explanation of people come back from war and become unemployed, but this is counteraffected by women coming back.

Unemployment data from national insurance contriibutions. But quite a lot is ommited: aggriculture, domestic service. Also anyone earning more than 250 pound excluded.

Unemployment rate of insured rises to 17% to 21. Peak of 22% in 1932. This si insured labour force. These relate to wageearners in industry. Domestic servants less likely to become unemployed. If you include uninsured workers, it is the same pattern, only about  a bit lower cycle.

Differences in age and sex

1.      Women are less likely unemployed. Part of this is because they do not report.

2.      Young people are less likely to be unemployed,

3.      Older men are no more likely to become unemployed, but they cannot get a new job

4.      Risk of unemployment falls with higher social class

5.      Unemp. in these industries that are expanded during war initiall. Then coal also (staple exports industries)

6.      Industries towards home market areless with unemployment

7.      Unemployment is very high in North and West, not so in elsewhere. Some places 70%.

This lead people to think this is a

structural change to newer industries from old staple.

25%-45% of the unemployment was sturctural.

1.      Alcraft - Richardson take and optimisting view - resources are transfered to new industries.

2.      counterargument. Not much evidence for this

1.      Mathew-Smee say output growth is not very high.

2.      TFP is falling in the first and rise slow in the second period.

3.      There is greater change during war periods than during interwar.

4.      New industries do not have very high productivivty growth.

5.      New industries are less capital intensive, so employment should rise.

6.      No correlation between mergers and efficiency gains

How do we explain the peaks

1.      1920's peak looked by Broadberry.

Real wage fall as nominal is reduced, but then price fell and wages stayed the same. So real wage and unemployment are correlated. 18% wage rise for people in employment.

Supply side shock (fall in the hours of work). DEamnd change as well. Workers had to reduce consumption during first world war - accumulated savings high. This shifted out the budget constraint outwards. So they can afford to consume more goods and more leisure. This underlines the hour reduction. Unions are much more concerned to reduce hours of work. 13% reduction in the hours of work. This is accompanied by a rise in wage. Productivity of te worker declines.. Wage and productivity gap.

What is causing the increase in real wage.

a.      Rather keeping the hourly wage constant they keep weekly rate

b.      Prices falling - nominal wages do adjust, but with a lag. Return to gold is the cause. Pound is overvalued, much higher iniially - 17% overvaluation. Contractory government policy.

Unfortunate consequence of demand falling prices and supply mix.

2.      Beenstock and Warburton on the second period. There is more contention here (disagreement)

Initially due to deficient agregate demand (little world trade). Improvement caused by low interest rates and housebuilding etc.

But unemployment and high real wages are highly correlated.

So much more demand side actually (critics to Beenstock)

try to account for determination of prices and wages so look for cause of high real wages. They look at aggregate supply function and demand to measure the difference and thus unemployment. They do several models: perfect and imperfect models(derived demand). In both casess real wages too high, count for 75% of the jobs losts in 29-32. They never explain why real wage too high.

Beenstock wants to find out what is actually causing real wage changes (is it supply or demand size). They think demand side.

Falling import prices causes an adverse demand shocks. This causes prices of traded goods to fall (import prices). Other countrieshave less money to buy british, but also employers costs get lower, but nominal wage inertia and strong bargaining on part of labour mean real wages don't decrease in line.

You have got higher profits of firms (second demand shock), workers wanr ro get some share of it. They may get this (more money to wage).

They have econometric effects for both effects. They are initiated in demand side shocks like world price (not supply side - not workers demanding higher wage)

Unemployment peprsists and real wages do not adjust

1.      Unions and wage rigidity - institutionalised wage setting covered 3/4

2.      wage relativities and coordination failures

3.      insider-outsider

Eviddence little (Hatton)

Features of UE

long duration / high turnover. Turnover and length increased. More to older men.

Crafts gave the causes of lterm unemployment

1.      little evidence of benefits

2.      Unemployment Assistance Board - hopelessness of lterm unemployment

3.      Beveridge - longterm very important

4.      duration dependency - employers did not want to

5.      caused an incresase in natural rate of unemployment


There was a very high turnover. But mostly the same people drift in and out.

Causes of high turnover

1.      Casual Employment - only about 4% are casual workers, they have 25% of unemployment. It is only a small element.

2.      Benefits - concerned withthe benefits to wages ratio. If increases then:

1.      Suppply increases because more people enter the labour system and claim benefits

2.      Effective supply is decreased - people search for longer - Benjamin and Kochin said 1/3 lower when dole would be at 1913 level. They point out that high correlation between bnefits and unemployment. Proportion of women claiming benefits was highly correlated with the regulations. Level of benefits go up quite quickly. "The rmy of unemployed staning watch in Britain at the publication of the General Theory was largely a volunteer army". By 1938 one could get 60% of average wage as a benefit. He claims that administration was more generous.


1.      In appropriate ad hoc model. Benefit affects supply and lost GDP is demand

2.      The assume that the government for benefit to ratio. Level of benefits not the ratio should be used

3.      Benefits and Unemployment correlated

4.      Huton - no evidence of search "The behaviour of the unemployed in searching for employment gives no evidence that the possibility of drawing unemployment insurance benefit has retarded the efforts of the unemployed to get back to work. It has removed the cutting edge that would otherwise attend that search"(Wright)

5.      Models not robbust. If you take out 1920(Worswick), then the result will not hold

6.      There is no correlation between the replacement ratio and unemployment (Collins)

7.      The average claimant was not a man eith eife and two children. Everyone is looked, only adult male shoul be. Then the benefits to wage ratio would never exceed 45%

8.      Sysstem no more lax

9.      More married women registering when benefits available. does not imply that they were unemployed before (Howson, Hatton)

10.    in 1936 73% of unemployed live below the powerty line

11.    long term unemployeed get less support.

12.    household evidence (Eichengreen). New Survey of London Lif and Labourin 1928 showed that head of families never choose unemployed, some secondary workers did.

13.    Keynes - state needs to interwene

3.      Demand for labour is decreased - they use benefit subsidize short time working. Temporary lay offs and the oxo system (systematic short time working). People temporarily stopped often. Working hours got shorter. More leisure for workers. But only about 150 000 on any systematic scheme of work sharing. (25% of workers working short time exploited the system).

1.      Not tied to wages (benefit close to employment wage)

2.      Does not depend on the amount worked in the industry

3.      You do not have to be unemployed for more than a day to claim benefit

National Insurance

1911 founded with only 2.25m coverage, 1921 extended coverage and allowance for children. nly short term. 1924 also long term benefit. 1931 National Economy Act - reduced benefits by 10% and means tested. 1934 centrally controlled payment, 1935 restrictions abolished. Now most covered.


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