Employment and Real Wages in the Inter-War Period

There was a wide measure of agreement that uniform tariff, the proceeds from which were to be unemployment in Britain during the 1920s was used to subsidise exports. aggravated by lack of international competitiveness. There was, however, a difference of emphasis This was the basic issue underlying the debate over between those like Keynes who considered that the the return to the gold standard. The experience of problem of the stickiness of money wages could be the restored gold standard did much to confirm the overcome by a suitable adjustment of the exchange arguments of those like Keynes who had claimed rate or tax/subsidy scheme for foreign trade and that sterling was overvalued at $4.86. This view of those like Pigou (1931) who were less convinced of the problems of adjustment to an overvalued the benefits of exchange rate adjustment. Pigou exchange rate has been endorsed by both Johnson questioned whether wage earners would accept (1975) and Friedman and Schwartz (1963). A major constant money wages if prices were to rise as a element in competitiveness was the level of real result of devaluation. The period in which workers wages. Britain's difficulties in the inter-war period could be tricked into accepting a reduction in real were made more acute by the increase in the cost of wages through an unexpected rise in prices relative labour between 1913 and 1924. This reflected the to money wages might be relatively short. Hence the sharp rise in wages in the First World War and the benefits of devaluation in stimulating output and post-war boom of 1919-20, which was only partly employment could not be sustained, corrected in the recession of 1921-2. The reduction This debate, which accepted the need for an in working hours in 1919, when normal weekly hours increase in competitiveness but centred upon how were reduced from 53 hours to 47, also raised the such an improvement might be achieved, was cut cost of employing labour. As a result hourly real short by the abandonment of the goid standard in wages in 1924 were 28 per cent higher than in 1913 mi and the contemporaneous world depression. and real wages measured in terms of own product Real wages rose despite the depreciation of sterling were increased by 20 per cent, while output per head in im because of the stegp dedine in impQrt pric£S had risen by only 5 per cent over the same period. of both food and raw materials A reducti0n in real The increased cost of employing labour was particuwaggs was Jess urg£nt jn the 193Qs than in the 192Qs larly noted and emphasised by Clay (1929). A competitive edge had been gained by the floating The rise in real and own product real wages of the pound on the suspension of the gold standard, occurred when changes were taking place in the Improved competitiveness was subsequently eroded international economy which were adverse to by the devaluation of the dollar in 1933 and Britain's traditional export industries. The fall in devaluations of the French franc in 1936 and 1938. demand for traditional exports, such as coal, cotton, Attempts to increase competitiveness by reducing iron and steel and ships came at a time when Britain real waggs jn {he 193Qs did not seem attractive was suffering from increased labour costs for dombecause of the proliferation of quantitative restric estic reasons. tions on trade. Little would have been gained by A reduction in real wages in the 1920s would have measures to increase British competitiveness, since assisted the competitivenes of Britain's ailing staple they cou,d have been countered b retaliatory industries as well as encouraging the growth of measures of other countries, employment in more labour-intensive sectors of the economy, such as distribution and services. In view What is surprising about the arguments of of the high degree of stability of money wages after Beenstock et al. is that they emphasise the impor 1923, a reduction in real wages would have been tance of real wage behaviour in the 1930s. This is much easier to achieve by a downward adjustment of paradoxical in view of the acute concern of contem the exchange rate rather than by cuts in money poraries over real wages in the 1920s, which is hardly wages. A reduction in real wages was implied by mentioned by Beenstock et ai, and their greatly Keynes's arguments for returning to gold at a lower reduced significance in the 1930s because of the parity. It was also implied by the recommendation of breakdown of international trade, the Macmillan Committee (1931) for the exchange (i)T. :r—: : f —rr-r: ; :— v & v 'Ihe author is grateful to Gillian McNamara for computing rate to be maintained and imports to be subject to a assistance.