When World War II ended, government spending collapsed, demand shifted across sectors, and millions of people left their wartime jobs for other pursuits. Government purchases, which had been almost half of economic output at the peak of the war, fell by 70 percent within a year. Thirteen million members of the armed forces were discharged back to civilian life, and consumer-focused industries that had converted to war production sought to reconvert. Some economic theories predict that those events would have led to a significant rise in the unemployment rate—but that did not happen. After hitting a low of 1 percent in the first half of 1945, the unemployment rate rose to a peak of 4.2 percent in spring 1946 and hovered just below 4 percent for several years until the 1949 recession pushed it to almost 8 percent.

Our research examines why the upheaval to US labor markets at the end of World War II resulted in only a slight increase in the unemployment rate and why the economy boomed despite a historic drop in government spending. It uses a wide range of data from government and private surveys to understand how the US economy was able to reallocate workers so quickly and what economic forces led to robust job creation despite the significant fall in government spending.

A widely used economic rule that links changes in output and unemployment predicts that the 24 percent decline in real economic output after World War II should have translated into a 12-percentage-point rise in the unemployment rate. Instead, the unemployment rate rose by only 3 percentage points. Our research attributes the breakdown in the rule to the significant decline in labor force participation rates, hours per worker, and labor productivity at the end of the war. To understand the reasons for the decline in labor force participation, we used detailed data by age and sex from the Census Bureau’s Current Population Reports. Our findings show that young adults had the largest drop in labor force participation after the war. Additional surveys reveal that many veterans took extended vacations after their discharge and that many enrolled in school. These two reasons for temporary withdrawal from the labor force explain the decline in labor force participation among men. Regarding women, several large surveys suggest that returning male veterans did not push women between the ages of 20 and 44 out of the labor force; instead, these women generally left the labor force to engage in household activities.

Many labor market theories predict that the high rate of layoffs at the end of the war and the substantial reallocation across industries and occupations would have been accompanied by a higher unemployment rate. To understand why laid-off workers didn’t end up unemployed, we analyzed worker transitions using a new dataset that follows thousands of people monthly from the 1940s through 1950. These data show a large increase in civilian layoffs and military discharges between August 1945 and early 1946. The vast majority of civilian workers who lost their jobs following the war moved directly into new jobs; the rest became unemployed or left the labor force. Returning veterans moved directly into civilian jobs, though a quarter temporarily exited the labor force.

Our research also explores whether the labor reallocations following the war involved climbing up or dropping down the career ladder. The data show that after soldiers returned from the war, they quickly returned to where they left off on the career ladder and then climbed the ladder steadily—even though most of them changed employers. In contrast, many of those who were laid off from civilian jobs at the end of the war experienced a significant drop down the career ladder. This finding suggests that the war temporarily boosted their occupational standing.

The high transition rate between jobs was only possible in an economy with significant job creation to replace the labor demand formerly generated by government spending. Thus, our research also studies factors that led to abundant job creation at the end of the war. Contemporary economists, forecasters, and policymakers worried that the economy would fall back into a depression once the massive war stimulus evaporated. However, the economy boomed as private demand for goods and services filled the gap. Our findings suggest that pent-up demand for durable goods explains much of the burst in private demand. War spending crowded out investment in business capital and consumer capital such as homes, motor vehicles, and appliances. As a result, capital stocks were far below the public’s desired levels by the end of the war. The fall in government demand at the end of the war freed up production capacity, allowing pent-up private investment to surge.

NOTE
This research brief is based on Shigeru Fujita, Valerie A. Ramey, and Tal Roded, “Why Didn’t the US Unemployment Rate Rise at the End of WWII?,” National Bureau of Economic Research Working Paper no. 33041, October 2024.