Interwar Unemployment Flashcards

1
Q

Trends in IW unemployment (7)

A
  • Hatton & Thomas (2013) – picture seems to be that NAIRU increase in 1920s (due to TUs, hours, staples) & stayed there in 1930s (with higher cyclical & LTU – Depression + hyst.)
  • Take with grain of salt because sources vary tremendously
    o “Board of Trade” – only in unionised sectors, which tend to be industrial, hence cyclical
    o Census enumerations – under-survey the u/e (reluctant to admit it) – most accurate
    o U/e benefits – extensive (2/3 of earners), but misses agriculture/services/govt/high earners (understates u/e)
  • Boyer & Hatton (2002) construct new index for unemployment data (from Board of Trade)
    o Board of Trade data underestimates u/e and overemphasises fluctuations
    o Average u/e rate 1870-1913 is 5.8%; average in interwar is 10.9%
    o u/e c. 8% 1923-29, then up to 17% by 1932, then back to 8.5% by 1937 – never actually lower than 7%, whereas in pre-war period, rarely exceeded 8% = persistence.
  • Solomou (1996) – very cyclical, severity increases over time & hysteresis are key features
  • Highest in: Traditional staple industries (e.g. coal, cotton), N England, Wales, Scotland (In 1929, unemployment was 3.3% in South East, 18.1% in Wales), Older people.
  • In 1920s, LTU was rare. Rose to 25% of unemployment by 1930s (Crafts)
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2
Q

Causes of High Unemployment

A
  • 1919 Shock to Working Hours - (Broadberry 1986, 1990)
  • Unemployment Benefits (Benjamin & Kochin, 1979)
  • Trade Unions
  • Structural Unemployment
  • Demand-Side Explanations
  • Exogenous shocks
  • Hysteresis = Persistence (LT unemployment is a subset of this)
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3
Q

1919 Shock to Working Hours (Broadberry 1986, 1990) (4)

A
  • Two main channels:
    o During WWI, consumers saved (real C down 14% due to diversion of resources), increasing their purchasing power, so demanded more leisure (normal good), so less hours working.
    o (Dowie, 1975) In 1919, the average working week fell from 54 hours to 47 hours – 8 hour day.
  • Nominal wage rigidity (Lennard, 2022) meant real hourly wage rate rose 13% on average.
  • Not helped by contractionary monetary policy to raise the exchange rate in order to facilitate return to Gold at pre-war parity, putting downward pressure on prices = further increase in real wage.
  • Created a “wage gap” (gap between labour productivity & real wages), sustained until 1940
    o Unit labour costs, ULC = WL/PY = W/L ÷ P/Y; wage gap increased ULCs via real wages.
    o Higher ULCs makes UK less competitive, reducing exports and hence AD contraction = demand-deficient unemployment.
    o Represents a one-off shift in SRAS, explaining persistently higher natural rate of unemployment in interwar period from 2% to 8% (Dowie, Broadberry).
    o Demand fluctuations explain variations about this level.
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4
Q

1919 Shock to Working Hours - HOWEVER (3)

A

However
- Solomou (1996):
o Broadberry deflates the nominal wage series with the RPI.
 Key to hiring is product real wage, not consumption real wage.
 Therefore, should deflate with the price of final output, i.e. GDP deflator.
o Doing this, wage gap is eliminated by 1922 – only a short-term transitory effect.
o If this explains all interwar unemployment, it has to occur via hysteresis.
- Hatton & Thomas (2010) – increases unemployment by 3% by 1922, but largely disappeared by 1929.
- Scott & Spadavetcchia (2011):
o Majority of lost weekly output from less hours was made up for (in LR) through increased hourly productivity (as working environments adapted).
o Reflects improvements in speed/quality of work, abolition of in-work rest breaks/periods of idleness due to bottlenecks & reductions in sickness/accidents.
o Reduction in working hours occurred in almost all other industrialised countries:
 UK experienced lowest proportional reduction in hours over 1913-1920, except France.
 UK real wage growth 1913-1920 was 6.9%, slightly above Australia/US, but much lower than European countries – relative competitiveness should not have suffered
o Major ‘social multiplier’ effects associated with reduction in hours – e.g. growth of industries associated with working-class leisure.

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5
Q

Unemployment Benefits (Benjamin & Kochin 1979) (4+3+Conc)

A
  • 1911 National Insurance Act: contributory u/e insurance benefits available to 15% of the workforce (2.2m workers).
  • 1920 Unemployment Insurance Act – increased coverage to 11m workers (workforce at 20.7m so 50%) & increased weekly benefits by 40%.
    Benjamin and Kochin (1979):
  • Unemployment benefits are the primary cause of interwar unemployment – ‘volunteer army’.
  • (Maki & Spindler, 1979) 3 mechanisms through which benefits create unemployment:
    o SA –> SA’ people join L force without genuinely seeking employment (claimants).
    o SE <– SE’ – effective labour supply falls as searches lengthen/people voluntarily leave jobs.
    o D <– D’ – more willing to lay off workers during downturns and bear cost of employer contributions.
  • 3 key features of u/e benefits in this period that make them especially bad for u/e:
    o Contributions unrelated to u/e experience.
    o Not proportional to wages.
    o Payable for short periods, especially if previously unemployed.
  • Present 3 pieces of evidence:
    1) Time-Series Regression
    o U = f(B/W) where B/W is the replacement ratio.
    o Find correlation on the replacement ratio is statistically significant.
    o Conclude that generous u/e insurance increased interwar u/e by 5-8pp.
    2) Juvenile Unemployment (16-17 year olds)
    o Harder for juveniles to get benefits (20-30 weekly contributions required) & paid at a lower rate (doubled at 18).
    o Juvenile unemployment is much lower (5%) than average (15%).
    o Running time series for juveniles, replacement ratio coefficient not significantly different from 0.
    3) Female Unemployment
    o 1931 Anomalies Regulations – increased tests for married women to get benefits.
    o After this, lower u/e among married women relative to single & women vs. men too.
  • Conclude that without benefits, u/e would have been ‘at normal levels through much of the period’.
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6
Q

Criticisms of Benjamin & Kochin (5)

A
  • Compositional evidence is flawed
    o Eichengreen (1987) – little incentive to register as u/e if not eligible for benefits – this affected both juvenile u/e (throughout) and female u/e (after 1931)
    o Hatton (1983) – juvenile u/e because they are more desirable workers, from even before WW1 (Beveridge)
    o Broadberry (1983) – female participation is too erratic to conclude
    o Therefore, BK79 rely on the regression
  • Hatton (2004) – replacement ratio used is inappropriate
    o Measures benefits for adult male with a wife and two children
    o Wage series is average wages for whole population
    o Therefore B/W ratio biased upwards – using average, B/W = 0.27 vs 0.37 – so in fact, below subsistence for much of period, so no incentive to get benefits
  • Irish (1980) – trending is a problem
    o Significance of α1 comes from fact that Ut and B/Wt are trended upwards, whereas log(Q/Q*)t is not
    o Adding any trended upwards variable, such as population, makes α1 insignificant
  • Solomou (1996) – identification problems
    o Hard to see it as a demand or supply function – replacement ratio influences labour supply, but output gap influences labour demand
    o Therefore, isn’t a proper model – can’t distinguish between D and S shifts
    o U/e and wages determined simultaneously, so causation runs both ways
    o Hatton (1983) finds effect is via employers being more willing to lay off workers, not labour supply
  • Cross (1982) – endogeneity problem
    o High u/e may mean that govt responds with policy
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7
Q

Unemployment benefits - alternative studies (3)

A
  • Harris (1988) – living standards show u/e was not voluntary
    o Uses data on average height of school children (proxy for malnutrition)
    o Average height decreases in 1930s (shorter in 1933 than 1929)
    o Also a negative relationship between local unemployment and children’s stature
    o Therefore, u/e not voluntary – has an adverse impact on their children
    o Rowntree - in 1936, 73% of u/e workers lived below poverty line
  • Eichengreen (1987) – secondary vs. household heads
    o Considered individual level data from “New Survey of London Life and Labour 1928”
    o Effect depends on elasticity of supply of labour – no relationship between replacement ratio for household heads, but there is one for secondary workers (23% of sample)
    o Counterfactual u/e rate with 1913 benefit levels is 6.8-7.4% (vs actual of 8.6%) (for adult males), so not more than a fifth of actual u/e (ct 1/3 to ½ of BK79)
    o Data limitations: truncated data (biasing influence upwards), focus on London (biasing influence upwards – little involuntary u/e) & absence of key variables
  • Hatton & Bailey (2002)
    o Use individual level data for London between 1929 and 1931 – 30k workers
    o Effect of replacement ratio is biased upwards by occupation and skill not being controlled for, leading to ‘spuriously positive effects’
    o Carry out regression for adult males, juveniles & females
    o Find that in all population cohorts, controlling for occupation and skill, the replacement ratio is insignificant – ‘no evidence that benefits induced u/e’
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8
Q

Voluntary unemployment assumption is unrealistic (5)

A
  • Collins (1982) – relationship drops away
    o Disaggregates calculations by industry for 12 – not statistically significant for 9
    o u/e in industries not positively related to industry specific replacement ratio
  • Metcalf et al. (1982) – replacement ratio just as high post-WWII, but not same levels of u/e
  • Eichengreen & Hatton (1988) – Belgian u/e increase much more rapidly in 1930s than GB, despite cuts in the rates of benefits and increasingly stringent qualification requirements
  • Crafts (1987) – no explanatory power over LTU, which is increasingly large % of L in 1930s
  • Hatton (2004) – 95% of vacancies taken within a week, suggesting u/e not choosy/picky
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9
Q

Defences of Benjamin & Kochin (1)

A
  • Crafts (1989) – specifies regression model with many variables to assess determinants of wage growth in GB, 1925-1939, and replacement ratio is one of only a few statistically significant determinants (along with trade union militancy)
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10
Q

Trade unions (9)

A
  • Pre-WWI, TUs were concentrated in only a few industries (e.g. crafts and building)
  • TUs spread in WWI in order to maintain production & minimise disputes – fairness & cost of living
  • Also encouraged by government – Trade Boards created & industry collective bargaining was standard
  • Union density up to 45% by 1920 (ct 22% in 1913) & 60% of employees covered by industry-wide agreements in the mid-1920s (but density down to 25% by 1929 (Hatton & Thomas, ’10)
  • Hines (1964) – changes in TU unionisation account for over 90% of variation in wages (by regression) – significant for unemployment (especially in 1930s)
  • Competing Claims Framework (Layard et al, 1991) (see diagram)
    o “Feasible real wage” – level of real wage consistent with profit-maximising behaviour of firms (prices set via wage markup)
    o “Target real wage” – employee supply of labour/collective bargaining
    o Equilibrium is intersection, giving us the NAIRU (no unexpected inflation/deflation)
    o TU bargaining power increased greatly into interwar, shifting target real wage right, increasing real wage and unemployment
    o Crafts (1989) – shows with regression model on wage growth that trade union militancy was statistically significant determinant of wage growth, 1925-1939
    o Feasible real wage rose too due to productivity improvements – compensated a bit
  • Broadberry (1986) & Pigou argue that the rapid spread of unionisation up to the 1920s led to greater nominal wage rigidity, explaining persistent u/e of 1920s
  • Calmfors & Driffill (1988) – inverted U shape relationship between real wages and degree of centralisation of collective bargaining (supported theoretically & empirically)
    o At firm level, wage bargainers account for high PED of firm in industry – moderated
    o At national level, bargainers take into account economy wide effects – moderated
    o At industry level, negotiators don’t take into account the externalities of their actions on the wider economy, but also have some market power
    o UK NAIRU dropped to 3% after WWII when “post-war settlement” meant that collective bargaining was much more centralised at national level (72% ct 42%) – suggests that not trade unions themselves, but degree of centralisation
    o Probably need more empirical data/research to determine true significance
  • Gazely & Newell (2007)
    o Calmfors/Driffill model weak because doesn’t account for open economy relationships and doesn’t include parameter for relative bargaining power of trade unions & employers
    o TUs have less bargaining power as unemployment increases
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11
Q

Structural unemployment (‘Old Optimists) (3)

A
  • Unemployment appears to be high in areas where old staples industries concentrated
    o June 1932 – u/e is 28% in Scotland, compared to 4% in London (new industries)
    o 1923-38 – u/e 23% in mining & 24% in metal trades vs. 7% in paper & 9% in food, drink and tobacco (Hatton, 2004)
  • Old industries particularly during the Interwar period
    o World trade grew at significantly reduced rate & collapsed in the 1930s
    o Loss of overseas markets – competition, own-country production & tariffs
    o Out-dated equipment and processes in the UK
  • Mechanism
    o GB moving to new industries in this period- cars, chemicals etc
    o Labour not fully mobile as jobs switch regions – creates frictional u/e
    o Moreover, new industries more capital intensive (labour-saving technology)
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12
Q

Structural Unemployment - Matthews et al. (1982) (3)

A
  • Create index of structural change
  • Index was 1.2 for 1924-37, compared to 1.6 for 1913-24 & 1.5 for 1937-51
  • Suggests pace faster post-WWII (when NAIRU around 3%)
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13
Q

Structural Unemployment - von Tunzelmann (1982) (2)

A
  • New industries not less labour intensive - in fact, reverse is true
  • Ratio of share of employment to share of capital was 2 in new vs. 1.5 in old
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14
Q

Structural Unemployment - Hatton (1986) (2)

A
  • Differences in u/e by industry/region are due to different incidence of cyclical fluctuations on different industries – old staples much more ‘cyclically sensitive’
  • However, regional u/e differences remain after controlling for mix of industries
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15
Q

Structural unemployment - not independent of economic activity (3)

A
  • Recession increases degree of structural u/e
  • Hatton (1986) – internal migration influenced by AD – higher AD supports more migration, which would have reduced structural u/e
  • Broadberry (1986) – structural u/e occurred in all countries with overvalued ERs in 1920s, so ER policy was partly to blame
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16
Q

Demand-side explanations (6)

A
  • Beveridge (1944) – ‘persistent weakness of demand for labour’
  • Barro & Grossman (1971) – (diagram)
    o Assumes exogenous AD constraint
    o Real wages can settle anywhere on B to C, but depressed L mkt means closer to C
    o Hence, real wages are pro-cyclical with employment (ct conventional – counter-cyclical) – supported by Broadberry (1983), Dimsdale (1984) and Hatton (1988)
  • BK79 – coefficient on log output gap is significant, suggesting importance of AD variations
  • Broadberry (1983)
    o Creates a disequilibrium model of u/e based on individual industries
    o Regressions show u/e not explained by supply side
    o Quantity signals swamped relative price signals & ‘demand deficiency’ caused u/e
  • Return to Gold at prewar parity
    o Gold Standard suspended during WWI, £ depreciates, but announced in 1919 that it will return to Gold at its pre-war parity
    o Makes expectations of prolonged contractionary, deflationary policy
    o Deflationary, so expectations of higher ULCs (lower prices + nominal wage rigidity)
    o Globally, GB highly at risk because not everyone going back to parity (e.g. France)
    o Hence, persistent u/e via expectations (1920-25)
  • Hatton & Thomas (2010)
    o Find correlation of 0.83 between UK and US unemployment in interwar ct correlation of 0.2 for 1890-1913
    o Suggests common international shocks are important explanatory variable
17
Q

Demand-side explanations - other notes (4)

A

ER Policy resulting from desire to return to gold at the pre-war parity, led to demand-side effects via the deflation of the price level to generate an appreciation of the exchange rate, which caused unemployment:

  • Return to Gold (see later):
    o Solomou (1996) – returning to gold = announcement of contractionary monetary stance:
     Under flexible ER, meant ER increased due to expected lower price level/higher r.
     Encouraged consumers to have inelastic inflationary expectations (low πe) → lower consumption and higher money demand (decreasing the supply of loanable funds, suppressing investment). Shifts IS and LM curves inward.
    o Anticipations of contractionary policy led to the downturn.
  • Monetary Policy
    o MP was particularly contractionary to facilitate the return to gold – inflation was at 20% p.a. and the Bank Rate increased to 7% in April 1920, up from 5% in 1918.
    o Shifts LM curve – higher interest rates so lower investment.
    o In an open economy model, this LM shift appreciates the real exchange rate, shifting IS left and further reducing Y and increasing unemployment.
    o Much of this was anticipated at the time of announcement of return to gold at 1913 parity.
    o But may not have been key:
     Solomou (1996) – increase in r in 1920 not key, but merely a symbol of recessionary forces under way since 1919 (deflationary MP & “wage gap”).
     Howson (1975) – increase in r too small to have a significant effect.
    o However, Dow (1998) argues it was ‘potent’ by triggering a change in confidence.
    o Broadberry (1986) – evaluates effectiveness of MP:
     LM steep (interest elasticity of money demand ≈ −0.2) → some role for MP.
     IS steep (interest elasticity of non-housing I ≈ −0.1, housing I ≈ −1.1) → ineffective.
     Interest elasticity of consumption low (≈ 0.05) → ineffective (real balance effect).
     Therefore main effects are via trade, through the ER (high r → ↑ ER).
     Early 1920s also saw decline in velocity of money, reinforcing contractionary policy.
    o Contraction contributed to deflation, by increasing real wages and also reducing export competitiveness, causing unemployment.
  • Moggridge (1972) showed that Marshall-Lerner condition was satisfied during interwar period with εx = –1.5 and εm = –0.5. Assuming ‘pass through’ and an overvaluation of 11%, balance of trade fell by £80 million in 1925. As a result, 750,000 jobs were lost.
18
Q

Supply-side Exogenous shocks (2)

A

WW1 - middle-class women in labour force, participation rates have risen

Other countries pass immigration policy - UK becomes net recipient of migration flows

More people in labour force, same opportunities to work –> higher unemployment

19
Q

Hysteresis (supply-side) (2)

A
  • Hysteresis – persistent unemployment with some history-dependent path of equilibrium u/e
  • Long-term unemployment (LTU) is specific individuals, but hysteresis is aggregated figures – hence, LTU is a subset of hysteresis
20
Q

Hysteresis - Crafts (1987) (3)

A
  • LTU was fairly scarce in the 1920s (5% of total u/e in 1929)
  • 1930s – average spell of unemployment was 1 year and 9 months
  • LTU very common in 1930s (25% of total u/e in 1936)
21
Q

Hysteresis - Thomas (1988) - “bifurcated labour market”

A

Two labour markets - 1 similar to 1920s (high turnover), the other with high instances of LTU in staple industries.
o Persistent u/e existed alongside rapid turnover
o High turnover due to: operation of insurance system, prevalence of casual employment & extent of low job attachment
o LTU due to
 Benefits/allowances – unlikely (see above) (not sufficient income)
 Hysteresis – dual labour market situation & duration dependence
 Structural u/e (see above)

22
Q

Hysteresis - Bartholomew (1995) - HOWEVER - picture of LTU is distorted

A
  • LTU=Unemployed over a year/Total unemployment (Conventional definition)
  • higher u/e means higher SR u/e, decreasing % of LTU – mistakenly seen as improving situation
  • lower u/e means increasing % of LTU if recently fired workers take up slack
  • Could be avoided by using labour force or total population in the denominator
23
Q

Hysteresis - mechanisms (1+5)

A

Hysteresis in both 20s and 30s, LTU only in 30s
1. Atrophy of human capital (LTU)
2. Loss of physical capital (LTU)
3. “Insider-outsider” hypothesis (LTU)
4. Trade Hysteresis (hysteresis only)
5. Real Indebtedness (hysteresis only)

24
Q

Hysteresis mechanisms - 1. Atrophy of human capital

A
  • Workers lose skills whilst unemployed – skills atrophy
  • “Cognitive dissonance” – accept unemployment once realise it is hard to get back to work
  • Bakke (1934) – studied a mechanic/lorry driver made unemployed in 1931
    o After 3 days, very optimistic
    o After 17 weeks, ‘sullen and despondent’
  • Crafts (1987) – probability of finding employment was dependent on duration of u/e
    o Probability of being reemployed in next 3 months is 70-80% if u/e <3 months, but decreases rapidly to 20% if u/e >12 months
    o Estimates hysteresis effect via H of 1.5% on NAIRU
  • BUT Eichengreen & Hatton (1988) – almost all u/e disappeared with WWII, so ‘most workers were clearly employable at some wage’
  • ILO (1942) – 1940 labour shortage forced employers to hire people, but found they had a significant, though not irredeemable, loss of skills
25
Q

Hysteresis mechanisms - 2. Loss of physical capital

A
  • Lower levels of employment are associated with lower levels of investment
  • Reduces level of physical capital from potential, reducing demand for labour – leads to u/e (i.e. negative spiral effect)
  • But literature describes these effects as fairly transitory
26
Q

Hysteresis mechanisms - 3. “Insider-outsider” hypothesis (3)

A
  • Blanchard & Summers (1986) – propose “insider-outsider” hypothesis
    o Wages are set by bargaining between “insiders” (current employees) and firms
    o Have no regard for “outsiders” (unemployed), creating persistent unemployment – no tendency to revert to pre-shock levels of u/e (determined only by shocks)
    o “Insiders” gain power from costs of hiring, firing & training
    o More likely within TUs, but possible even without them (just need adverse shocks)
    o Empirically explains post-war European unemployment well
  • Crafts (1989)
    o Estimates equation for wage determination in 1930s Britain
    o Implies 1% increase in u/e composed only of LTU leads to 0.2% increase in wages
    o Could be due to “insider-outsider” hypothesis or “declining employability” (i.e. a sorting process and/or skills atrophy)
  • Solomou (1996) – this is not institutionally specific i.e. a general theory, so why in the interwar? TUs aren’t a full part of the picture because they are on the decline during IW period (density down from 45% in 1920 to 25% by 1929 – can only explain first peak
27
Q

Hysteresis mechanisms - 4. Trade hysteresis (Solomou, 1996) (7)

A
  • ER overvaluation 1920-22 increased import penetration.
  • Imports as a % of GDP rose from 21% in 1920 to 24-25% by 1923 (stayed here until after 1932 Tariff, therefore LR i.e. hysteresis).
  • Once foreign firms had established distribution networks to the domestic economy, changes to ER didn’t lead to reversion to old equilibrium – the market had been lost permanently, so there was limited future growth. Most firms penetrating the UK also had better supply side potential (i.e. technology, education, endowments and more flexible labour market).
  • Exports also suffered as a result of the overvaluation – exports fell sharply by 30% in 1920-21.
  • Although there was correction and improvement from 1922-25, in 1926 they dropped drastically (but this was due to the General strike and not over-valuation).
  • However in the LR, only recovered to approximately 80% of the pre-war level. This indicated hysteresis effects through the permanent loss of export markets.
  • Moggridge (1972) showed that the M-L condition was satisfied during interwar period with ex = –1.5 and em = –0.5. Assuming ‘pass through’ and an overvaluation of 11%, balance of trade fell by £80 million in 1925. As a result, 750,000 jobs were lost.
28
Q

Hysteresis mechanisms - 5. Real Indebtedness (Solomou, 1996) (4)

A
  • During 1918-20 boom, staple industries increased debt to finance investment (since they were optimistic at end of war and in absence of German competition).
  • Permanent deflation during the recession (return to gold) meant that real debt burdens increased substantially.
  • As a result, new investment was held back as they struggled to meet large debt repayments alongside poor export performance and rising import penetration. There is evidence of excess capacity in the 1920s.
  • Goldsmith (1984) supports this view – UK non-financial debt/income ratio increased from 1.55 in 1913 to 2.76 in 1929, whereas these ratios fell in France/Belgium, countries who returned to gold at devalued rates.
29
Q

CONCLUSION (9)

A
  • Demand-side is a good explanation, but persistence requires supply-side channels. The demand-side explanation (exchange rate policy) and supply side rigidities (reduction in working week, benefits etc.) also interact with each other to lead to a particularly severe economic outcome. In AD/AS, IS and LM shifts, so AD shifts left, which leads to falling prices. But nominal wage rigidity increases the real wage in the SR, leading to a fall in Y and rise in unemployment.
  • Furthermore, the demand side shocks seem to have created longer-term adverse supply-side effects (through hysteresis). There are 5 main channels: atrophy of human capital, capital scrapping, ‘insider-outsider’ hypothesis, trade hysteresis and real indebtedness. Hysteresis means demand side shocks may have had an adverse effect on LRAS.
  • Therefore, supply-side is the key factor, but demand side factors may also be important in causing long term supply-side changes via hysteresis.
  • In 1920-21 (recession), unemployment was caused by adverse demand-side (tight fiscal policy, the overvalued exchange rate, and the contractionary monetary policy that was employed as a result) and supply-side (reduction in working hours) factors.
  • In the 1920s, unemployment did not return to normal levels, therefore there was persistence. Trade hysteresis and the real debt channel were most important, as well as the persistently low demand due to restrictive monetary policy:
    o Hysteresis was more of a problem in 1920s, as in failure of unemployment to go back to pre-crisis levels. Went from 2% to 11.3% in 1920-1, but only fell back down to 7.3% in 1929.
  • In the early 1930s (Great Depression), unemployment was driven by a fall in exports.
  • In the 1930s, unemployment returned to its pre-crisis levels, but this was still high. More conventional hysteresis channels (long-term unemployment, capital scrapping etc.) were more important.
    o Bifurcated labour market: those who were unemployed became slowly trapped in long-term unemployment as new (more conventional) hysteresis channels emerged, while the economy recovered and unemployment fell.
     Conventional hysteresis channels were important in explaining why unemployment did not return to pre-war levels, but not as much of a problem as 1920s (7.3% in 1929 to 7.8% in 1937).
  • Throughout this was exacerbated by the long-term decline in emigration due to the imposition of immigration controls across the world.