Discussion paper
DP147 Long-Term Unemployment, Excess Demand and the Wage Equation in Britain, 1925-39
The relationship between unemployment and the rate of change of money wages in interwar Britain is re-examined. It is argued that improved estimates of the wage equation can be obtained by taking account explicitly of factors which change the level of excess demand associated with the measured unemployment rate. In particular, the evidence suggests that long-term unemployment did not act as a restraint on the growth of money wages. New estimates of the wage equation imply that the NAIRU rose during the 1930s as the proportion of unemployment that was long term was higher than in the late 1920s.
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