Unemployment and Unemployment Benefits in Twentieth-Century Britain: A Reply to Our Critics

Abstract

In the turbulent years following World War I unemployment compensation in Britain was raised from its 1913 level of 27 percent of average wages to levels that neared 60 percent of wages. The unemployment rate, which had averaged 4 percent during the 20 years before World War I, rose dramatically, averaging 10 percent even during the expansions of the late 1920s and late 1930s. World War II inflation drove the ratio of benefits relative to wages down to levels comparable to those of the pre-World War I years and, during the immediate post-World War II period, the unemployment rate in Britain was lower than ever before or since. Massive changes in British social policy begun in 1966 raised benefits relative to wages and markedly relaxed conditions on their receipt. Unemployment has followed benefits upward and, by 1981, both the unemployment rate and the ratio of benefits to wages were at levels higher than during the late 1930s. Our critics argue that this story is misleading. In addition to a rebuttal of our critics' claims, this reply contains: (1) new crosssectional and time-series evidence that the unemployment insurance system raised the unemployment rates in interwar Britain; and (2) new cross-sectional evidence on the magnitude of the insurance sys-