1930s Unemployment
Who Was To Blame?

Much recent research has been stimulated by the controversial claim that the persistently high level of unemployment experienced in Britain during the interwar period was largely due to the generosity of the unemployment insurance system. In Discussion Paper No. 66, Research Fellow Tim Hatton surveys the quantitative research related to the determinants of interwar unemployment. He finds that it undermines any causal relationship between the unemployment insurance system and the high levels of unemployment. Hatton argues that this research has shown the administration of benefits and the benefit scales were not as generous as has been contended; nor was the connection between differences in benefit rates and the incidence of unemployment by demographic groups so straightforward.

Early work measured the extent of benefit-induced unemployment using single-equation models in which the labour market was assumed to be in equilibrium. This has been severely criticized on both empirical and theoretical grounds, as Hatton notes. In particular, he argues that the competitive market-clearing approach is an inadequate characterization of the period and does violence to the observed facts. The empirical evidence on the question of market clearing vs. non-clearing appears to support the latter. If the wage rate did not adjust to equate the supply and demand for labour, employment must therefore have been governed by the 'short side' of the market - the demand curve. This raises two questions: what were the determinants of labour demand, and how were wage rates determined if they did not adjust to equilibrate supply and demand? On the former, the evidence suggests both that the labour demand curve was a downward-sloping function of the wage and that there were significant shifts in the curve due to factors other than the wage. Once again, many of the single-equation models cannot measure these effects.

Explanation of wage rate determination provides an even greater challenge since simple competitive models are of little value. Hatton argues instead for an explanation which incorporates both market forces and institutional factors. How variations in consumer prices, benefits and minimum wage legislation affected wage rates through the process of collective bargaining is far from clear, but recent work is promising he notes.

The very uneven incidence of joblessness across industries and regions has led many writers to ascribe 1930s unemployment to a failure of labour markets to adjust to rapid structural change in the economy. More recent research has indicated that this uneven incidence may be as much an effect as a cause of high unemployment. Though structural change was not exceptionally rapid during the period, it may be that the inflexibility of relative wages exacerbated the problem of labour market adjustment. If wage rigidity were an important factor, however, there would have been areas of both excess supply of labour - unemployment - and excess demand - job shortages. Yet, there is little evidence of labour shortage even in the most prosperous areas. This casts doubt on explanations which emphasize wage inflexibility.

Other explanations have involved labour mobility. If only workers had been willing to move to areas where there were jobs, the argument goes, unemployment would have been less severe. Much of the research done in the 1930s was directed to examining labour mobility. Together with more recent analyses this research suggests that with some exceptions, labour was highly mobile. But as the depression intensified in the 1930s, and regional and industrial imbalances increased, migration tended to fall! For many workers, the potential benefits from migration were not apparently overwhelming. The availability of unemployment benefits and the costs of migrating and acquiring new skills may have inhibited migration, and so exacerbated the unequal incidence of unemployment. Hatton concludes, however, that lowering these barriers might not have substantially reduced total unemployment.


The Analysis of Unemployment in Interwar Britain: A Survey of Research
T J Hatton

Discussion Paper No.66, June 1985 (HR)