From 1921 to 1938 unemployment in Britain averaged 14 percent and never fell below 9.5 percent. Three largely independent sets of evidence indicate that the prolonged high unemployment was due to the operation of an unemployment insurance scheme that paid benefits that were high relative to wages and available subject to few restrictions. We estimate that the insurance system raised the unemployment rate by five to eight percentage points on average and that in the absence of the system unemployment would have been at normal levels through much of the period. Although a few interwar observers saw clearly the effects of unemployment insurance, Keynes and his followers did not.

From 1921 to 1938 unemployment in Britain averaged 14 percent and never fell below 9.5 percent. Three largely independent sets of evidence indicate that the prolonged high unemployment was due to the operation of an unemployment insurance scheme that paid benefits that were high relative to wages and available subject to few restrictions. We estimate that the insurance system raised the unemployment rate by five to eight percentage points on average and that in the absence of the system unemployment would have been at normal levels through much of the period. Although a few interwar observers saw clearly the effects of unemployment insurance, Keynes and his followers did not.