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Atlanta Fed Working Papers


Interwar U.K. Unemployment: The Benjamin and Kochin Hypothesis or the Legacy of “Just” Taxes?

James M. Nason and Shaun P. Vahey
Working Paper 2006-4
May 2006

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Benjamin and Kochin (1979, Journal of Political Economy) present regression estimates to support their hypothesis that larger unemployment benefits increased U.K. unemployment post–World War I (WWI). The Benjamin-Kochin (BK) regression is easy to replicate. When the replication is widened to include income tax rates and WWI observations using Bayesian Monte Carlo methods, the evidence moves against the BK hypothesis and in favor of regressions that include the capital income tax rate. We explain these results with Daunton (2002, Just Taxes). He argues that U.K. tax rates were set during WWI and the interwar period to achieve an equitable, or “just,” mix of taxes and debt. Neoclassical theory suggests that capital income tax rates fluctuations created inefficient factor input allocations that drove up interwar U.K. unemployment.

JEL classification: E32, E62, N14, N34, N44

Key words: U.K. interwar unemployment, replacement ratio, capital income tax rate, Markov chain Monte Carlo


The authors thank William Coleman, Steven Durlauf, Quentin Grafton, Tim Hatton, William McCausland, Kwanho Shin, Mark Weidenmier, and seminar participants at the Australian National University, the 2005 Australian Macroeconomic Workshop, the University of Calgary, the University of British Columbia, the Reserve Bank of New Zealand, and Claremont McKenna College for useful comments. Kateryna Rakowsky provided excellent research assistance. Special thanks go to Marietta Carlisi and Annie Tilden of the research library of the Federal Reserve Bank of Atlanta for their responsiveness to many requests. The views expressed here are the authors’ and not necessarily those of the Federal Reserve Bank of Atlanta, the Federal Reserve System, or the Reserve Bank of New Zealand. Any remaining errors are the authors’ responsibility.

Please address questions regarding content to James M. Nason, Federal Reserve Bank of Atlanta, Research Department, 1000 Peachtree St., N.E., Atlanta, GA 30309, 404-498-8891, jim.nason@atl.frb.org, or Shaun P. Vahey, Reserve Bank of New Zealand, Economics Department, 2 The Terrace, P.O. Box 2498, Wellington, New Zealand, 64 4 471-3767, vaheys@rbnz.govt.nz.

For further information, contact the Public Affairs Department, Federal Reserve Bank of Atlanta, 1000 Peachtree Street, N.E., Atlanta, Georgia 30309-4470, 404-498-8020.