Expectations versus reality: why didn’t the unemployment rate increase more after WWII?

The end of World War II (WWII) prompted massive declines in government spending (70 percent in 1 year), shifts in demand across industries, and job changes for millions of people. Typically, one might expect such substantial economic changes in a short time to lead to a spike in the unemployment rate. However, at the end of the war, the unemployment rate instead only rose by 3 percentage points, still below its prewar rate.

In “Why didn't the U.S. unemployment rate rise at the end of WWII?” (National Bureau of Economic Research, Working Paper 33041, October 2024), authors Shigeru Fujita, Valerie A. Ramey, and Tal Roded attribute the small increase in the postwar unemployment rate to a lower labor force participation rate, quick job-to-job flows (despite people changing jobs across industries), WWII veterans returning to their previous positions, and a postwar boom in job creation.

To reach their conclusions, the authors use many sources, including data from the U.S. Bureau of Labor Statistics, U.S. Census Bureau, and the Women’s Bureau, as well as survey data collected by Gladys Palmer in early 1951. Both the Palmer data, which include detailed work history for about 10,000 people, and the government data show declines in the postwar labor force participation rate that could have dampened the increase in the postwar unemployment rate. The authors correlate declines in the male labor force participation rate with WWII veterans taking vacations or reenrolling in school before returning to the labor force. The authors link declines in the female labor force participation rate to women being “pushed” out of the labor force by men returning from war and “pulled” toward family responsibilities at home.

However, the authors state that the labor force participation rate alone cannot explain the small unemployment rate increase. Next, they analyze the Palmer data to demonstrate that the majority of workers who separated from their employer after WWII transitioned directly into a new job. In addition, the authors estimate that job-to-job transitions (for both WWII veterans and displaced workers) occurred quickly despite being across industries and that WWII veterans returned to their prewar jobs.

The authors also use a modern neoclassical model of pent-up demand to investigate why there was a postwar boom in job creation. They argue that high military spending during the war crowded out consumer investment as well as spending on durable goods. Thus, once the war ended, strong consumer investment in durable goods and other residential and business investments set the stage for the job creation boom.

Finally, Fujita, Ramey, and Roded conclude by tying their research to the 21st century economy. Their takeaways include that large declines in government spending and large transitions of workers across industries do not necessarily mean rises in the unemployment rate. They also deduce that periods in which consumer spending on durable goods and investments are crowded out will be followed by strong economic recoveries.