Was unemployment in the period 1919-1939 ‘voluntary’?

Some argue that unemployment in Britain remained at a high level due to bargaining and institutional rigidities, the effects of long-term unemployment and the high turnover of the period. This essay will argue that most unemployment in this period was involuntary, and a result of demand shocks affecting the natural rate of unemployment, although it will reason that unions, long term unemployment and inefficient labour markets also played a role in maintaining British unemployment at a high level.

In 1921, British unemployment peaked both in terms of level and rate, with 2.212 million unemployed, representing an unemployment rate of 12.2%. After this, unemployment remained high until World War II, never falling below 1 million unemployed throughout the period. This persistence in unemployment was attributed by some, in part, to the high levels of unionisation in Britain at the time, and hence the existence of wage and institutional rigidities. In the interwar period, around to of the British labour force was covered by Union memberships, peaking at 44% of the labour force in 1920. Data suggests that union density in the 1920s was twice that of the pre-War decade. However, there was a massive drop in unionization during the interwar period, from 8.3 million members in 1920 to only 4.4 million by 1933. The revolution in bargaining over pay, however, was not simply one of numbers. The strength of unionism in pay bargaining was also enhanced by the development of formal collective bargaining structures, such as Trade Boards, which set minimum wages.

Established in four low paid sectors under the Trade Boards Act of 1909, their scope was massively expanded with the Trade Boards Act of 1918 and by 1921 there were 63 Trade Boards covering 3 million workers. It is estimated, in fact, that from 1919 onwards, around of the labour force was covered by collective agreements. These Trade Boards and agreement, research suggests, were a cause of significant wage rigidities at least from 1923 onwards due to coordination failure and protection from outsider competition. Notwithstanding, researchers have found little evidence to support this argument, as massive drops in prices in the interwar period meant that there was no exceptional real wage rigidity. For instance, real wages were about 10% higher in 1929 than in 1913, and rose another 10% by 1938. Despite this, it could be argued that a combination of market power resulting from unionisation and lack of coordination could have increased the NAIRU, with a special emphasis on the lack of coordination, as evidenced by the breakdown of both the National Industrial Council in the 1920s and the failure of the Mond-Turner talks (1927-8). Hence, wages were too high because of a coordination problem, which played a part in maintaining the high levels of unemployment, as the labour market could not clear at those wage rates.

Another reason often cited for the persistence of unemployment was the increase of long-term unemployment alongside a high turnover in the interwar period. As the proportion of long-term unemployed rose from 5% in 1929 to 25% in 1936, the average number of spells of unemployment also rose, reaching 7.3 in 1931, with an average duration of 20.8 days each for men who were employed at the time when this research was carried out. Clearly, having more people out of work on a long-term basis would raise the natural rate of unemployment. The debate, however, focuses on the causes of this long-term unemployment rise. Whilst some maintain that it was caused by an increase in the generosity of the benefits system, this argument does not seem to be supported by the empirical evidence. A survey carried out by the Pilgrims Trust found that 44% of their sample of long-term unemployed were living on or below the poverty line used in the study. They also found that the benefit to wage rate ratios for those over 45 were only rarely over 80% of the normal wage rates, and hence the benefits were not providing anywhere near as much money as a job would, and were therefore not providing an incentive to leave work. However, despite the clear lack of financial incentive to be on benefits, 55.8% of the male long-term unemployed and 68.9% of men unemployed over 5 years fell into this group in February 1938. In general, it seems therefore that the long-term unemployed were not a group for whom constant low re-employment probabilities would result from the generosity of the benefit system.

However, there a significant amount of duration dependency, worsening the probability of the long-term unemployed of getting reemployed, as argued by Crafts. This was due to psychological changes, loss of skills over time and the fact that the longer one stays out of work, the worse the signals sent to employers regarding one’s competence, as backed up by the Unemployment Assistance Board and the Pilgrim’s Trust. 20% of those unemployed for more than 3 months were not able to get reemployed within three months, whilst 80% of those employed for 9 to 12 months were not able to get reemployed even after a year. Hence, as the employability of the workforce fell with time, the natural rate of unemployment rose; according to Crafts’ estimates, this rise was of 1.5% in the 1930s. Crafts also finds that a 1% increase in long-term unemployment leads to a 0.2 percentage point increase in the wage rates. This shows that the unemployed were not being able to efficiently bring down average wages, as only ‘insiders’ could do this. Thus, it was the flow of unemployment which mattered to wages, and not the stock.

High turnover is another factor worth considering. Although it is sometimes blamed on casual workers, as statistics show that in the interwar period, 25-35% of casual workers were unemployed at any one time, this does not seem like a reasonable assumption as only about 4% of the total unemployed were casual workers in the 1930s. However, the high turnover does appear to be a significant problem, considering it produced results equivalent to half of the labour force having a period of unemployment during any one year. This could, in part, be explained by temporary lay-offs, the oxo system and short time working. For instance, in 1924-1929, 18% of cotton workers were on short time working schemes, which meant they worked 14 hours less than average per week. This was argued to be encouraged by the benefit system, as benefits could be paid for periods of unemployment as short as a day after the first episode. However, only 20% of those unemployed were ‘temporarily stopped’, short time working. Of those, only 1 in 4 of the short time working were in any kind of systematic scheme of work sharing, and hence this theory is not supported by evidence. Nor does it explain the lack of demand for labour at the time, which was causing unemployment to remain high. Benjamin and Kochin offer a reason in the form of search unemployment. They argue that people were making use of the generous benefit system to take time out of work to search for a better paid job. They conclude that the unemployment rate would have been lower in 1927-1929 and 1936-1938 had the dole been no more generous than in 1913. This meant unemployment would have been 5 to 8 percentage points lower.

However, the quality of their statistical evidence has been heavily criticized following their publication. Whereas Smith critized the model for mixing, without consideration, both supply and demand factors, Hatton found that there was no evidence for the mechanism of search unemployment. Worsick also found that, omitting 1920, the model was no longer robust. There was a massive jump in unemployment benefits in 1920-21, which was not related to the announcement of returning to the gold standard, which caused the other effects observed. Hence, it does not seem valid to assume that unemployment and b/w are correlated, especially when disaggregated by industry, such as done by Collins. Furthermore, the benefit system was well administered to make sure only people who genuinely needed help were getting it. The Unemployment Assistance Board produced reports in 1937 and 1939 in Newcastle claiming that of the 36000 applicants, only 422 were suspected of “voluntary unemployment”, which shows people in general were not making use of the generous benefit system to take time off work.

Additionally, one of the reasons why unemployment figures rose as b/w rose is because more people registered as unemployed when they knew they could be getting benefits, and not because more people were necessarily unemployed, which affects the data. Also, there seems like there would be little incentive for this search behavior, considering 73% of unemployed workers were living below the poverty line in 1936, despite benefits, as these became means tested, which meant a lot of people had to turn to the Poor Law. Furthermore, New Survey of London Life and Labour (1928) carried out at the micro level (households) showed that only secondary workers in a household may have chosen benefits rather than work, not male adults, which hence meant benefits had a small effect on unemployment. In fact, no more than a fifth, rather than Benjamin and Kochin’s third to half, of interwar unemployment could be attributed to the benefit system.

It seems from the argument in this essay, therefore, that the majority of unemployment was indeed involuntary. However, it is worth noting that a survey by the Pilgrims Trust found that only 29% of the long-term unemployed surveyed were still searching with a serious commitment to find work, even though relatively few (5% of men) were “unemployable”. There was, therefore, a certain degree of voluntary unemployment amongst the long-term unemployed. Crafts also found that workers chose not to leave their families in “outer Britain”, where they couldn’t find a job, instead of moving to look for work, and thus preferred survival on allowances to migration, which again shows there was a certain degree of voluntary unemployment in the economy, albeit not a lot. Most unemployment was involuntary, initially due to internal demand shocks, and later due to external shocks.

Another important point to note is that, although this essay ran through the main reasons for the persistence of the high unemployment in Britain, the reasons varied a lot from the 1920s to the 1930s. In the 1920s, real wages increased and there was an appreciation of the exchange rate, causing some people to choose more hours of leisure. This supply shock affected the economy, as did announcements of return to the gold standard and a fall in prices, which caused unemployment in the 20s. In the 1930s, however, real wages were at an unsustainably high level, thus accounting for 75% of job losses in the period 1929-1932. This was due to falling import prices as a result of the slump, and demand shocks, despite sticky nominal wages, which meant market couldn’t clear.

Therefore, different effects were taking place at different points in time to maintain the high unemployment, which was mostly involuntary. These include, but are not limited to, demand shocks, coordination failure and the lack of reemployability of the long-term unemployed.