Not nearly as long as medieval technology was. So while our materials are better, our techniques are not. While we have the potential to produce something better, that potential isn't realized.
Modern Craftsmanship < Ancient Craftsmanship <<< Modern
craftsmachineshipAn ancient swordsmith with a hammer could produce a better sword then a modern swordsmith with a hammer, but thats because if we wanted war swords we would use a company with robots and lasers. We could design a stronger, sharper, more awesome sword given the same materials and then produce ten thousand a day forever. But of course no one bothers to do that because we use guns and missiles instead, but if we did do it our swords would be better.
Its like saying ancient egyptians had better methods of moving stone blocks by hand then we do. Its true, but thats because we don't bother with stone blocks and if we did, they would be moved by machines. So everyone might be arguing the same thing, sortof?
Meanwhile, in Back On Topic land:I have conducted some arena science.
21 werewolves vs 21 wereworlves packing cave spider silk clothes
--> clothed werewolves win, with a few surviving (mostly injured)
21 werewolves (grand master all relevant skills) vs 21 clothed werewolves (grand master same skills)
--> clothed werewolves win with
19 surviving most with not too bad injuries.
21 iron sword dwarves vs 21 iron sword dwarves with silk clothes
--> clothed win with like 3-4 survivors, one bleeding on the floor others injured
21 sworddwarves (grandmaster all relevant skills) vs 21 clothed sworddwarves (grand master same skills)
--> clothed win with maybe 10 survivors, plenty of injuries and missing parts
conclusion: obviously clothes help. Big sloppy arena fights exaggerate the effect due to the N^2 law but they still have a significant effect on standard combat that increases with skills and decreases with power of weapons used. Since claws and teeth are hilariously bad, clothes are going to have a big impact on the outcome of any fight involving creatures. They matter alot less when weapons are involved, because subtracting a little bit of force and slightly blunting an attack still leaves you with a potentially mortal injury.
Is it overpowered? Arguably, but I would say not really unless you can actually convince everyone to pile on clothes or even wear more then 3 socks and a cloak...
TLDR: The issue is that claw/tooth based attacks are just barely able to penetrate dwarf anyway. Add a cloak and it just isn't getting through.