Out of Work. Richard K Vedder
explanation of how business cycles are generated in the United States.
We are indebted to a bevy of persons, including all those cited above. Several students, most recently Emily Stroud and Sam Chamberlin of Ohio University’s Economics Department and David Broscious of its Contemporary History Institute, helped provide historical documentation. Judith Daso’s staff in the government documents room of the Vernon Alden Library at Ohio University was always helpful; we were also assisted by staff at the Stanford University Library and the Library of Congress. John Gaddis has striven to provide a congenial working environment in the Contemporary History Institute. A variety of colleagues and graduate students have offered insight and suggestions over the years. At Ohio University, we have benefited from the comments of three Economics Department colleagues, David Klingaman, Douglas Adie, and the late John Peterson. Equally useful has been our Contemporary History Institute colleague (and distinguished Truman-era historian) Alonzo Hamby. Gene Smiley of Marquette University and Richard Timberlake of the University of Georgia have made insightful suggestions, as have Charles Baird of California State University at Hayward and Terry Anderson of Montana State University.
Other encouragement has come from Fred Glahe of the University of Colorado, Lawrence Kudlow of Bear Stearns, Joint Economic Committee economist Chris Frenze, and Steve Hanke of Johns Hopkins University.
Becky Huff and Angie Cook of the Economics Department at Ohio University provided invaluable secretarial help, as did Hallie Willard of the Contemporary History Institute. The Earhart Foundation indirectly helped with some needed financial assistance. Last, but never least, the project would never have reached fruition without the support of our wives, Karen Vedder and Gladys Gallaway.
We conclude this introduction on a sad note. The person who did the most to publicize our views on the labor market to a broader audience was the late Warren Brookes. Warren was a businessman who turned to journalism in midlife, writing an extraordinarily perceptive column dealing primarily with economic matters. He did as much to further the “supply-side” revolution in the late 1970s and early 1980s as any other person, and more recently he uncovered evidence that devastatingly exposed the true economic costs of new environmental laws and regulations. His untimely death has robbed the world of a great journalist, a superb economist, and, personally, a wonderful friend. We dedicate this book to Warren’s memory.
RICHARD K. VEDDER
LOWELL E. GALLAWAY
1
The Unemployment Century
Of the five centuries during which the United States has been settled by Europeans, in only one, the twentieth century, has unemployment been a dominant political and economic issue. Whereas in nineteenth-century America passions erupted over inflation and deflation, tariffs and taxes, slavery, the disposition of public lands, central banking, and the regulation of monopolies, public debate about the “unemployment problem” was sporadic and localized. Indeed, the word “unemployment” did not even exist during most of the century, and when Alfred Marshall wrote the definitive nineteenth-century treatise on economics in 1890, he mentioned the word on but one page.1
By contrast, unemployment became the dominant economic issue of the twentieth century both within the academy and in the realm of public policy. During the 1890’s, there were but two articles dealing with the issue in serious journals of economics and statistics; by the 1930s, scores of papers were published discussing the measurement, determinants, and effects of unemployment.2 While in the last presidential election of the nineteenth century, that of 1896, the central economic issue was monetary policy and the gold standard, by 1932 unemployment had moved center stage.
Rising public concern over unemployment led to political pressure to “do something” about the unemployment problem. Even in the first decade of the new century, the unemployment arising out of the panic of 1907 led to cries to eliminate the root cause of financial instability. This, in turn, ultimately led to the Federal Reserve Act, the first major federal involvement in macroeconomic intervention. A few years later, during the 1920–22 economic downturn, a presidential commission on unemployment was created.
In the 1930s, a revolutionary activist approach to the unemployment problem was implemented as part of the New Deal. No longer was the government simply content to try to eliminate monetary instability or study the causes of unemployment. New legislation involved the government in labor markets in important new ways. Even before the New Deal, the Davis-Bacon Act got the federal government into the business of setting wage levels. The National Industrial Recovery Act, the Wagner Act, the Fair Labor Standards Act, and legislation creating the Civilian Conservation Corps and the Works Progress Administration are but a few examples of the burst of new federal government initiatives designed to bring about “relief, recovery, and reform”—and lower unemployment—during the New Deal.
The crowning manifestation of government activism was the Employment Act of 1946, which declared the eradication of unemployment a national priority. Public-policy efforts to end unemployment did not end with the Employment Act. Activism peaked in the 1960s and 1970s. Not only was further legislation passed emphasizing the importance of full employment as a national goal (e.g., the Humphrey-Hawkins Act), but numerous new institutions were created as an outgrowth of the War on Poverty (e.g., the Jobs Corps and the Office of Economic Opportunity). To deal with persistent unemployment, a variety of new public-assistance programs, such as Medicaid and food stamps, were created. While the Reagan era of the 1980s brought a stifling of new unemployment initiatives, little was done to dismantle the apparatus of federal programs, and the activist monetary and fiscal policies, that had been created over the previous decades. Just as earlier Republican presidents Eisenhower and Nixon had not attempted to dismantle the New Deal and the Great Society, so President Reagan, by far the most conservative modern American president, did relatively little to undo the “safety net.” The legacy of macropolicy expansionism established in the New Deal era was left largely intact.
While interest in the unemployment problem tended to rise and fall with the business cycle, concern was not exclusively directed to cyclically related unemployment. Thus in the prosperous 1920s, there was mounting concern about technological unemployment. Likewise, the concept of what we now term “frictional unemployment” was developed.3 Similarly, in the equally prosperous 1960s, structural unemployment was a concern—the mismatch of skills of those unemployed with the skills needed for jobs available.
In the 1970s, economists coined a term to refer to the noncyclical forms of unemployment: “the natural rate of unemployment.” Much of the modern discussion about employment is related to the natural rate of unemployment and its determinants. Thus the twentieth-century discussion of the unemployment problem is partly a by-product of concerns over economic fluctuations, but also in part of concern over idleness that reflects other noncyclical factors.
Why the rise in interest in unemployment? To a large extent, the issue grew in importance with the urbanization of America. Before the Civil War, most Americans were engaged in farming. Most farmers, in turn, were either self-employed, or slaves who could not become unemployed almost by definition. After 1890 or 1900, cheap or free public land in the West was no longer readily available, and the proportion of Americans working for wages had grown strikingly with industrialization and urbanization. In the nineteenth century, the urbanized proportion of the American population rose from 6 to 40 percent of the total, and it became a majority by 1920.4 Whereas no more than 5 percent of the labor force was engaged in manufacturing in 1800, by 1920 that proportion approached one-third.
The decline in the relative importance of self-employed individuals increased the vulnerability of workers to unemployment, and as a consequence the incidence of involuntary joblessness rose with the passage of time. Although good annual data are unavailable for almost all of the nineteenth century, it is unlikely that the nation suffered from a double-digit unemployment rate, at least on any sustained basis, until the 1890s. It was the Great Depression of the 1930s, however, with a full decade of double-digit unemployment, that led to the overwhelming preoccupation with the unemployment question.
Unemployment increasingly