This paper investigates why the U.S. unemployment rate rose only a few percentage points despite the dramatic decline in government spending and other upheaval at the end of World War II. Using a new longitudinal data set based on archival sources and government surveys, we study the many facets of this question. We find five main results. First, withdrawals from the labor force at the end of WWII were an important part of the explanation for the small rise in the unemployment rate. These withdrawals tended to be concentrated among females between the ages of 20 and 44 and male war veterans. Second, among those staying in the labor force, most of the workers who separated from their jobs moved directly into a new job. Third, workers accomplished these job-to-job transitions despite moving across industries. Fourth, returning veterans quickly returned to their previous position on the occupation ladder whereas those laid off from civilian jobs experienced a significant step down the occupation ladder. Fifth, a neoclassical model suggests that the post-war boom in job creation was a direct consequence of the crowding out of investment in consumer durable goods, residential capital, and business capital by military spending during the war.
Authors
- Acknowledgements & Disclosure
- We are grateful to Claudia Goldin and William Collins for sharing their digitized Palmer data with us. We thank the great team of UCSD undergraduates and Philadelphia Federal Reserve research assistants who digitized and cleaned the data from 2017 to 2023: Johan De Rijke, Cole Dreier, Suzanne Golshanara, Aishwarya Kudrimoti, Ashlee Liu, Anne Park, Madison Perry, Rachel Yang, and Cindy Zhang. We also thank Gillian Brunet, Alex Field, Price Fishback, Robert Gordon, Willi Mutschler, Garey Ramey, Allison Shertzer, and Johannes Wieland for helpful comments. Valerie Ramey gratefully acknowledges financial support from National Science Foundation Grant No. 1658796. The analysis and conclusions in this paper are the work of the authors alone and do not necessarily represent the views of the Federal Reserve Bank of Philadelphia, the Federal Reserve System, or the National Bureau of Economic Research.
- DOI
- https://doi.org/10.3386/w33041
- Pages
- 71
- Published in
- United States of America
Table of Contents
- Introduction 3
- Backdrop of the Period 6
- Data Sources 7
- The Palmer Data 8
- Supplemental Government Data 13
- The Role of Labor Force Participation 14
- Male Labor Force Participation 15
- Female Labor Force Participation 18
- The Breakdown in Okun's Law 25
- Labor Reallocation in the 1940s 31
- Career Evolution After WWII 36
- Veterans 37
- Displaced Workers 38
- Reconversion and Industry Reallocation 41
- Macroeconomic Forces Leading to Job Creation 44
- Macroeconomic Background 45
- A Simple Neoclassical Model of Pent-Up Demand 48
- Model Simulations of Pent-Up Demand 52
- Summary of Pent-Up Demand Results 56
- Conclusion 57
- Data Sources 65
- General Data Sources 65
- Data Sources and Construction for Okun's Law Analysis 66
- Neoclassical Model Details 67
