Employment and Real Wages in the Inter-War Period

There was a wide measure of agreement that unemployment in Britain during the 1920s was aggravated by lack of international competitiveness. This was the basic issue underlying the debate over the return to the gold standard. The experience of the restored gold standard did much to confirm the arguments of those like Keynes who had claimed that sterling was overvalued at $4.86. This view of the problems of adjustment to an overvalued exchange rate has been endorsed by both Johnson (1975) and Friedman and Schwartz (1963). A major element in competitiveness was the level of real wages. Britain's difficulties in the inter-war period were made more acute by the increase in the cost of labour between 1913 and 1924. This reflected the sharp rise in wages in the First World War and the post-war boom of 1919-20, which was only partly corrected in the recession of 1921-2. The reduction in working hours in 1919, when normal weekly hours were reduced from 53 hours to 47, also raised the cost of employing labour. As a result hourly real wages in 1924 were 28 per cent higher than in 1913 and real wages measured in terms of own product were increased by 20 per cent, while output per head had risen by only 5 per cent over the same period. The increased cost of employing labour was particularly noted and emphasised by Clay (1929).