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Hysteresis and persistent long-term unemployment: the American Beveridge Curve of the Great Depression and World War II

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The results are striking: the interwar United States is characterized by pure hysteresis, with a completely insignificant [unemployment] level effect.

Gordon and Schultze (1988, p. 300)

Hysteresis appears to be an important feature of American depression.

Blanchard and Summers (1986, p. 69)

Abstract

Long-term unemployment plagued the American economy of the Great Depression. The stigma of a long unemployment spell made reentering employment difficult even during the brisk economic recovery, which lead to unemployment hysteresis and persistently high joblessness. Unemployment figures disaggregated by duration confirm the importance of hysteresis for the Great Depression, as the long-term unemployed were less likely to return to gainful employment until the war. Using the theoretical framework of the Beveridge Curve, I find that hysteresis was a significant problem during the 1930s, but that the essentially unlimited labor demand during the World War II provided jobs even to the long-term unemployed. As a result, labor market conditions in the 1950s resembled those of the 1920s prior to the Depression and so the labor market scars of the Great Depression were healed.

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Notes

  1. The situation would undoubtedly worsen by later in the decade, though data are not available from Buffalo to examine this possibility.

  2. “Works managers in Greenwich testified that even a short period of unemployment handicapped a man in his efforts to market his labour. There was, first of all, the preference that the employer had for the man who had just come from a job. In all probability he would be more competent than a man who had been away from his tools for some period. The handicap increased with the length of time out of work. ...[T]he complaint was made even among the labourers that the man just out of a job was given the preference. ...The general impression among the men was that the chances of getting a job were inversely proportional to the number of men who had come out since they were discharged” (Bakke 1933, pp. 50–51).

  3. Blanchard and Wolfers (2000) provide an overview of these arguments and a strong case for the interaction between adverse shocks and inflexible labor market institutions. Ljungqvist and Sargent (1998) provide an example of a structuralist view on the European unemployment problem of the 1980s.

  4. See Table 1 for some evidence to this effect from Philadelphia.

  5. This curve is often attributed to Beveridge (1944), though it is not explicitly defined in that book and should perhaps instead be attributed to Dow and Dicks-Mireaux (1958) where the unemployment–vacancy relationship is discussed at length.

  6. The economist John Cochrane voiced support for this view in a recent interview: “When we discover we made too many houses in Nevada some people are going to have to move to different jobs, and it is going to take them a while of looking to find the right job for them. There will be some unemployment” (Cassidy 2010).

  7. In the 1930s an example would be the numerous jobs available in agriculture in California, while farmers could not find work in states affected by the Dust Bowl (Gregory 1991) or more recently the example of steelworkers in Pittsburgh who must become nurses in a different city (Shimer 2007).

  8. Unemployment benefits only begin at the state level in Wisconsin in 1932 and at the national level in 1935, so this would not have played much of a role in the early phases of the Depression (Price 1985).

  9. See Baldwin (1988), Dixit (1989), Franz (1990), Dixit (1992), Feinberg (1992), and Cross (1993).

  10. See Friedman (1968), Phelps (1967, 1968), Blanchard and Katz (1997), Ball and Gregory Mankiw (2002).

  11. See (Kendrick 1961, p. 320).

  12. Labor unions lobbied the Roosevelt administration to block job retraining programs for those hired on emergency job programs like the WPA as there were already too few jobs for the skilled union workers that made up their membership (Jensen 1989, p. 577).

  13. Note that both theories will generate hysteresis in unemployment as an inpulse to the unemployment rate will tend to persist due to this discrimination on the part of employers.

  14. I do not stress the term structural unemployment as the many long-term unemployed are in some sense structurally unemployed, as there are reasons other than current business cycle conditions impeding their employment. However, with sustained labor demand for such a large magnitude even the long-term unemployed will be hired, so they represent an intermediate case. As argued in Standing (1983), discussions of structural unemployment in this context are often muddled and unclear.

  15. This effect can be seen in the ranking model of Blanchard and Diamond (1994). A model of stigma for the long-term unemployed is presented in Vishwanath (1989), which predicts lower exit rates from unemployment for the long-term unemployed.

  16. If there were data on hiring rates for the period and if the assumption of a stable unemployment rate was satisfied, then a matching efficiency term could be derived, which would define an isoquant.

  17. Note that there are no discouraged workers here, and any nonemployed “gainful” worker counts as unemployed even if they are not actively seeking employment.

  18. To complicate things further, the Census Bureau performed the direct work of conducting the survey.

  19. Weir (1992) revisits these estimates and improves upon the Lebergott series.

  20. The likely possibility of procyclical labor force participation also figures prominently in Romer (1986)’s argument for spurious volatility in unemployment rates.

  21. For robustness, I include alternatives to the BCP estimates from the Conference Board series in the form of the American Federation of Labor monthly unemployment series and the author’s own calculations of a monthly unemployment rate. The results are little changes by the choice of unemployment rate.

  22. 1937–1938 was a sharp but brief recessionary period which does not seem to have lasted long enough to have had a significant hysteretic effect.

  23. The shift in priorities from creating more employment to deal with a surplus a unemployed workers, which was the problem of the 1930s, to the priority of creating more war material given a rapidly diminishing pool of surplus or unemployed workers in the early 1940s, makes for a stark contrast. The possibilities for increasing war production using the unemployed and any available worker are discussed extensively in the reports of the Office of War Mobilization and Reconversion.

  24. Diamond and Şahin (2015) argue that this means that shifts in the Beveridge Curve are not very informative about structural changes in the economy in terms of a natural rate of unemployment, but these regular shifts related to the business cycle can be adequately explained by a hysteresis-based explanation such as the one presented in this paper.

  25. The choice of using a was dictated to smooth out noise while minimizing the distortion of the underlying series. This method is preferred to seasonal adjustment due to issue related to seasonal adjustment as discussed in Wright (2013). A 7-month moving average, symmetric with three months on either side of the center month, was chosen visually to smooth seasonal variation without eliminating trends.

  26. Concerns about veterans returning to high postwar unemployment were prominent among the framers of the GI Bill, which subsidized education for veterans which also kept them from the labor force for a few years (Olson 1973). Lawrence Klein was able to successfully forecast a rapid postwar recovery due to pent-up demand in sectors like consumer durables before the GI BIll was passed, so unemployment likely would have remained low even without the GI Bill (Woytinsky 1947).

  27. In the interest of brevity and a lack of data on duration, I do not discuss racial differences in employment prospects, though twice of many blacks as white were unemployed in Philadelphia for both genders, and they would have faced both discrimination based on both race and unemployment duration, making their prospects even more dire (Palmer 1938, p. 22).

  28. The recovery period is marred by the sharp but brief 1937–1938 recession.

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Acknowledgements

The support of the Institute for New Economic Thinking and the ALL-UC Economic History Association is much appreciated. Many thanks go to Eric DeLisle for his invaluable assistance in the Social Security Administration Archives and to Diego Garcia and John Escobar for their research assistance.

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    Gabriel P. Mathy

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Larry Ball, Jon Faust, Martha Starr, Evan Kraft, Bob Feinberg, Alan Isaac, John Parman, Henry Hyatt, and seminar audiences at Johns Hopkins, George Mason University, the College of William and Mary, the Census Bureau, the Social Science History Association, the Southern Economic Association Meetings, and American University provided useful comments.

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Mathy, G.P. Hysteresis and persistent long-term unemployment: the American Beveridge Curve of the Great Depression and World War II. Cliometrica 12, 127–152 (2018). https://doi.org/10.1007/s11698-016-0158-1

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