Post-war Unemployment
Dangers of consensus

For much of the post-war period the problem of unemployment was widely believed to have been solved by the Keynesian revolution, and the rise in unemployment during the 1970s was initially regarded as an anomaly. In the context of the twentieth century as a whole, however, it is the period of low and stable unemployment in the 1950s and 1960s that now appears unusual and requires explanation. In Discussion Paper No. 541, Research Fellow Stephen Broadberry argues that attempts to explain this low unemployment in terms of buoyant world demand beg the question of how the UK economy was run at such a high pressure of demand in the 1950s and 1960s without creating runaway inflation.

Keynesians argue that if unions press for greater wage increases than are justified by productivity growth, inflation will accelerate and the government will have to deflate demand and increase unemployment to bring the target and feasible real wages back into line. Broadberry explains that the target and feasible real wages were kept in line in the post-war period through a combination of accelerated productivity growth, which he attributes to opportunities to catch up with US productivity levels, and wage restraint, which he attributes to the consensual nature of the post-war settlement. He notes, however, that the post-war settlement also entrenched the restrictive practices and collusive agreements that had developed during the 1930s. As a result, the rate at which the UK caught up with US productivity levels fell, which contributed to the UK's relative economic decline.

Broadberry then assesses the incentives facing the three major interest groups in the settlement. Governments wanted full employment because they feared the electoral consequences of association with the mass unemployment and deflation of the 1930s; so they were willing to use demand management to maintain full employment. Unions accepted wage restraint in return for full employment, while governments implicitly agreed not to interfere in matters such as restrictive practices, immunities and union activity on the shop floor, where self-regulation was deemed appropriate. Given high demand and wage restraint, industry was still able to enjoy high profits despite unions' restrictive practices, so long as the cosy system of cartelization and restrictive practices in product markets that had developed during the 1930s remained in place. The post-war settlement therefore depended on the government's allowing industry to continue with a form of self-regulation through trade associations rather than enforcing a vigorous anti-trust policy of the US type. Broadberry concludes that the UK's post-war settlement came to underwrite low productivity, as the prevailing consensus enabled all parties to avoid difficult issues and thereby restrained the growth of not only the target real wage but also the feasible real wage.

Why was Unemployment in Postwar Britain So Low?
Stephen Broadberry

Discussion Paper No. 541, May 1991 (HR)