Labor Force and Unemployment in the 1920's and 1930's: A Re-Examination Based on Postwar
Experience
Author(s): Robert M. Coen
Source: The Review of Economics and Statistics, Vol. 55, No. 1 (Feb., 1973), pp. 46-55
Published by: MIT Press
Stable URL: http://www.jstor.org/stable/1927993
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LABOR FORCE AND UNEMPLOYMENT IN
THE 1920'S AND 1930'S: A RE-EXAMINATION
BASED ON POSTWAR EXPERIENCE
Robert M. Coen *
I Introduction
virtually no cyclical variation, since annual
changes in labor market conditions are not
A NNUAL data on the labor force were not
taken into account. Thus, Lebergott's annual
collected by the United States govern-
estimates are not of the same character as the
ment before 1940. The decennial censuses prior
annual (or monthly) estimates prepared by
to 1940 did include labor force enumerations,
the Census Bureau after 1940,2 and unemploy-
although the definitional basis of these figures
ment rates derived from them are not truly
was the "gainful worker" concept rather than
comparable with the official series for the post-
the labor force concept which underlies census
1940 years.
data beginning in 1940.' Stanley Lebergott
Empirical studies of post-World War II data
(1964) has undertaken the most careful and
indicate that the size of the labor force in the
exhaustive adjustments of the gainful worker
short run depends in part on the degree of
figures to make them consistent with the labor
tightness in the job market.3 The search for
force concept and with the sampling procedures
used by the Census Bureau in its Current Popu-
2 This point was raised some time ago by Martin Gains-
brugh. In commenting on an earlier but similar set of
lation Surveys which began in 1940. He has
Lebergott's estimates, he noted that, "The basic informa-
also constructed an annual labor force series for
tion (employed by Lebergott) is static in character as
the 1900-1939 period which is consistent with
compared with the dynamic concepts of labor force in-
corporated in census or sample enumerations after the 1940
his adjusted decennial census figures. One
census" (1957, pp. 239-240).
shortcoming of these annual labor force estiLebergott's unemployment rate estimates for the 1920's
mates is that they do not fully reflect the in-
and 1930's have been used in the notable econometric study
of the labor market by Lucas and Rapping (1969) covering
fluence of economic variables on labor force
the period 1929-1965, despite the fundamental difference
participation. His procedure was basically to
between this series and the official annual estimates be-
(1) obtain detailed labor force participation
ginning in 1940. The controversy which has arisen over
whether the Lucas and Rapping model explains labor market
rates by age, sex, and in some cases, nativity,
behavior in the 1929-1939 period (see Rees (1970) and
for decennial census years, (2 ) interpolate these
Lucas and Rapping (1972)) cannot be fully resolved, in my
rates linearly between census years, and (3)
opinion, until more satisfactory estimates of the unemploy-
ment rates in these years (such as the ones presented in
apply the interpolated rates to population data
this paper) are used in statistical tests of the mnodel.
for the intercensoral years. As one might ex-
3 See, for example, the studies of Tella (1964, 1965),
pect, the resulting labor force series displays
Dernburg and Strand (1966), Strand and Dernburg
(1964), Kuh (1966), Black and Russell (1970), and Bowen
Received for publication April 25, 1972. Accepted for
and Finegan (1969) who present a critical review of earlier
publication September 1, 1972.
* This research was supported by the National Science
works.
In recent years the Department of Labor has undertaken
Foundation, Grant 1686. I am indebted to Dana N.
surveys of nonparticipants in the labor force in an effort to
Stevens and Michael J. Varn for computational assistance
determine directly reasons for nonparticipation (see Flaim
and to Bert G. Hickman for helpful comments.
1971). Data for 1967-1971 confirm to some extent the
1 The gainful worker concept placed an individual in the
labor force if (1) he was working or (2) he was not work-
ing but was "willing and able to work." Measurements
beginning in 1940 place an individual in the labor force if
(1) he is working, (2) he is not working but is actively
seeking work, (3) he is not working but is waiting to be
recalled to a job from which he has been laid off or is
waiting to report to a new job, or (4) he is not working
and not actively seeking work because he is temporarily ill
or because he believes there is no work in his line available
findings of the econometric studies noted above. Nonparti-
cipants classified as discouraged because they could find no
jobs or thought that no jobs were available decreased in
number as the unemployment rate fell from 3.8 per cent in
1967 to 3.5 per cent in 1969, then increased in 1970 and
1971 as the unemployment rate climbed to 5.9 per cent.
The magnitude of these changes, however, is much smaller
than those suggested by estimates of participation relations.
Also, the Labor Department's survey data indicate that the
absolute number of discouraged workers of the type noted
in his community.
above averaged about 355 thousand during the period
[46]
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LABOR FORCE AND UNEMPLOYMENT 47
work is, after all, a costly undertaking, and the
willingness of individuals to engage in job
outline the determinants of the potential labor
force, i.e., the labor force that would be avail-
search ought to depend on the probability of
able at full employment. We then specify the
success of the venture. When unemployment
relation between the potential labor force and
increases and job opportunities decline, some
the actual labor force.
The potential labor force relative to the work-
individuals who were seeking work may become
discouraged and leave the labor force, and
ing-age population ought to depend on a variety
conversely when employment increases. On the
of economic, institutional, and demographic
other hand, unemployment means loss of in-
variables. The decisions of households regard-
come, so that an increase in unemployment may
bring some individuals into the labor force as
families attempt to maintain their incomes.
The evidence suggests that the discouraged-
worker effect prevails over the added-worker
effect.
ing labor supply involve choices between income
and leisure, given the level of real wages.4 If
real wages, which may be determined largely
by labor productivity, are increasing more
rapidly than desired income, members of house-
holds who are employed, or seeking employ-
This study presents new annual estimates of
ment, may choose to work fewer hours or some
labor force and unemployment in the 1920's
may withdraw entirely from the labor force.
and 1930's which allow for the dependence of
Desired average hours per worker and labor
labor force participation on the state of the job
force participation might then both depend on
market. The approach to be taken makes use
real wages. In practice, the link between labor
of a labor force participation equation fitted to
force participation and real wages is likely to
post-World War II data as an interpolator be-
be rather weak, since determination of the
tween Lebergott's adjusted decennial census
household members actually assigned the task
figures. The estimates appear to stand up well
when judged in the light of several reasonable
criteria, and they lead to a view of this histori-
cal period which differs in some important re-
spects from that suggested by Lebergott's
series. Also, the initial analysis of the pos;twar
data provides some new insights into the de-
terminants of labor force participation.
of earning income is greatly influenced by in-
stitutional factors and social customs which
establish the nature of family life. Nonethe-
less, the real wage deserves to be tested and is
included in our empirical analysis. Institutional
factors are, of course, difficult to quantify, and
they will necessarily be treated indirectly by
including a constant term and a trend in the
potential labor force equation.
Section II of the paper presents the empiri-
Demographic variables measuring the age or
cal analysis of participation behavior in the
postwar years. The new labor force and un-
employment estimates for the 1920's and 1930's
are discussed in section III where they are
compared with Lebergott's series. Section IV
summarizes the findings.
sex composition of the working-age population
or the ratio of the working-age population to the
total population are likely candidates for in-
clusion in the potential labor force equation;
but none of these was found to be an important
causal variable in the relations fitted to post-
war data. Significant changes have taken place
II Determinants of Labor Force Participation
in the age structure of the population and in
The labor force participation relation utilized
labor force participation rates of different age-
in this study is derived in two steps. First, we
sex groups, but the net influence of these
changes on aggregate participation appears to
1967-1969, even though the unemployment rate remained
be small and is accounted for by other variables
below 4 per cent. Estimates of the number of discouraged
included in this study.
workers derived from the econometric studies of participa-
tion vary considerably, but they are all based on the as-
sumption that there are no discouraged workers (at least on
a net basis) when the unemployment rate equals 4 per cent.
Thus, the new survey data raise some doubts about both
the cyclical variability and absolute number of discouraged
workers found in previous econometric studies.
'These remarks, like the empirical work which follows,
ignore the possible dependence of the work-leisure choice
on the desired rate of saving of the household. In the more
general case, the supply of labor might be influenced by the
level of household wealth and the rate of interest, as well
as by the real wage.
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48 THE REVIEW OF ECONOMICS AND STATISTICS
One exception to the above remarks is the
potential average hours per worker, that is,
inclusion of military emplovment as a determi-
average hours at full employment. In a cyclical
nant of the potential labor force, defined to in-
downturn employers generally reduce both
clude only civilians. Military employment is
average hours and the number of employees, so
not a perfect substitute for civilian employ-
that deviations of either of these variables from
ment and is not entirely voluntary. The effect
their full employment levels should serve as
of an increase in military employment on the
indicators to workers of the state of the job
civilian labor force cannot be established from
market. Furthermore, reductions in either em-
a priori considerations. If the increase is ac-
ployment or average hours will result in declines
complished through the draft and the draftees
in workers' incomes. Stating this relationship
were not initially in the civilian labor force, the
algebraically, we have
size of the civilian labor force may be little
L LP E EP\
N -N =a5N -N Ja6(H -HP), (2)
affected. However, the draftees may be taken
in part from the civilian labor force. In this
where
case, the decrease in the civilian labor force
L = actual labor force
may be partially offset by the entrance of sec-
E = actual employment
ondary family workers attempting to maintain
EP = potential employment
family income, given that rates of pay in the
H = actual average hours
military are below civilian levels. If the inHP = potential average hours.
crease in military employment is accomplished
If full employment existed, both expressions
without resorting to the draft, the effect is again
on the right-hand side of (2) would be zero,
quite uncertain. In view of these consider-
and the actual participation rate would be equal
ations, it was decided to attempt to explain the
to the potential participation rate. The param-
size of the civilian labor force, in which par-
eters a5 and a6 measure the strength of the
ticipation is voluntary, and to estimate the
discouraged-worker or added-worker effects.
impact of military employment on the civilian
Positive values indicate that the discouraged-
labor force.
worker effect is dominant, and negative values
Bringing together these hypotheses regarding
that the added-worker effect is dominant.
determination of the potential labor force, we
To complete the model we must express EP
can specify the relation algebraically as:
and HP in terms of observable variables. To
define potential employment, let us assume that
NL= a, + a2t + a3 - + a4W,
N 1N(1
e is the proportion of the labor force that would
be employed at full employment; that is, e is
where
the employment rate that workers consider to
LP =-potential labor force
be the full-employment employment rate; then
N -noninstitutional population of working age
EP = eLP. (3)
t = time trend
A -armed forces
Note that e is not the full-employment employ-
W -real wage rate.
ment rate as viewed by policy makers, but by
Our second relationship states that the differ-
ence between the actual labor force participa-
workers. The views of these two groups might
well differ, and it would be interesting if we
tion rate and the potential participation rate
could obtain an estimate of e as it is defined
depends on cyclical variations in the job market
here. Unfortunately, this is not possible, as we
as they effect the probability of obtaining work
shall see.
and workers' incomes. In particular, the differ-
ence between the actual and potential partici-
The potential average hours variable is some-
what more difficult to specify. Let us suppose
pation rates depends on (1) the difference
that average hours, H, can be partitioned into
between the ratio of actual employment to
a trend component, H1, and a cyclical compo-
population and the ratio of potential employ-
nent, H2, and that the trend component is
ment to population and (2) the difference be-
tween actual average hours per worker and
simply the sum of a constant and a linear trend.
Then
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LABOR FORCE AND UNEMPLOYMENT 49
H1 = bo + b1t, (4)
age and older.5 Three variants of equation (8)
are presented in table L.0 The first equation
and
(1.A) is similar in form to relations commonly
H2 = H - H = H -bo- bit. (5)
found in the econometric literature on labor
We shall assume that H1 approximates poten-
force participation. The effect of the real wage
tial average hours, so that the quantity H -H
on potential labor force is constrained to zero,
is approximated by H - bo- blt. An alter-
as is the cyclical effect of average hours on
native approach is to replace the trend by the
actual labor force. Employment conditions and
real wage, in accordance with the above argu-
armed forces are both found to be significant
ment which links desired average hours to the
determinants of the participation rate; the signs
real wage. This alternative will also be investi-
of the coefficients confirm the discouraged-
gated.
worker effect observed by other researchers and
Substituting from (3) and (5) into (2), we
suggest that an increase in armed forces pro-
have
duces a net reduction in the civilian labor
L E LP
force.7 The equation shows rather high first-
N = a5 - + ( -a5e)
N NN
'The sample is limited to data through 1966 because the
+ a6H - a6bo -a6bit, (6)
official series on labor force and employment were changed
in that year from a 14-year-old-and-over basis to a 16-yearand substituting from (1) for LP/N, we obtain
old-and-over basis.
LE
The labor force, employment, population, and armed
- =a5-+ (1- -a5e)a,
forces data are taken from the Economic Report of the
NN
President, 1967. Average hours per worker are a weighted
A
average of average hours of private employees and gover+ (1-a5e)a2t + (1 - a5e)a3 -
ment civilian employees, the weights being proportional to
N
the number of employees in each sector. Government civil+ (1-ae)a4W + a6H
ian employment figures are taken from the National In-
- acbo- a6b1t, (7)
come and Product Accounts. Average hours of govern-
or
ment employees were assumed to be 2,000 per year
throughout the period studied. Average hours of private
LEA
N = co + clt + C2 N + c3N- + C4W + c5H,
employees are computed from Bureau of Labor Statistics
data on private man-hours and private employment. The
(8)
final measure of average hours has the dimension of
thousands per year.
where
The money wage rate is the ratio of an estimate of total
Co = (1 - a5e)al - a6bo
labor income (derived by Bert G. Hickman and the
cl= (1 - a5e)a2-a6b,
author) to total man-hours of employed persons. Total
labor income is compensation of government civilian emC2= a5
ployees plus private labor income, the latter being defined
C3= - a5e)a3
as the sum of private employee compensation (exclusive
C4= - a5e)a4
of that paid by proprietorships and partnerships) and an
C5= a6-
imputed labor share originating in proprietorships and
partnerships. The imputation is based on the assumption
Equation (8) is the basic participation re-
that the labor and nonlabor shares in income originating in
lation to be investigated here. It should be
the noncorporate sector is the same as that in the corporate
noted that several of the "sitructural param-
sector. The after-tax money wage is the money wage multi-
plied by one minus the average tax rate (federal, state,
eters" cannot be identified from estimates of
and local) on personal income. The tax rate has been
the c's. Two parameters, a5 and a6, which measmoothed to remove cyclical variations. The after-tax real
sure the cyclical response of the labor force to
wage is the after-tax money wage divided by the implicit
GNP deflator for consumer expenditures and has the
employment and average hours, are identifiable.
dimension of dollars per hour.
However, the full-employment employment
6 Other variants of the participation equation were ex-
rate, e, and the parameters of the potential
amined but are not reported here. In particular, a lagged
adjustment formulation of equation (lA) was found to be
labor force and average hours relations cannot
superior to (LA) itself, but there was no evidence of lagged
be identified.
adjustment in equations (iB) and (1.C). Furthermore,
Estimates of equation (8) were obtained
equation (lA) with lagged adjustment still yielded a con-
siderably poorer fit than equations (1B) and (1C).
from aggregate annual data for the period
'Two sources of variation in employment may well
1949-1966. The labor force, population, and
produce an upward bias in its estimated coefficient. First,
employment data refer to persons 14 years of
sampling variation in measured employment will also be
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50 THE REVIEW OF ECONOMICS AND STATISTICS
TABLE 1. - ESTIMATES OF LABOR FORCE PARTICIPATION
uals. The negative and highly significant co-
EQUATIONS, ANNUAL DATA, 1949-1966
efficients on the hours variables indicate that
Regression Coefficients and t-Values (in parentheses)
an added-worker response occurs as hours
fluctuate cyclically. Given the highly signifiVariable or Equation
Statistic 1.A 1.B 1.C
cant discouraged-worker effect evidenced by 'the
coefficient of the employment variable, the fol-
Constant term .3717 .6348 .6032
(5.817) (11.30) (10.26)
lowing picture of labor force behavior over the
t -.0003 -.0015 cycle suggests itself. In the early stages of a
(2.017) (6.939)
downturn in economic activity it is common for
E/N .3901 .5701 .6084
employers to reduce average hours of work
(3.254) (7.982) (7.585)
before they begin to make sharp reductions in
A/N -.7217 --.6394 -.6168
the number of employees. Our participation
(4.359) (7.077) (6.171)
equation indicates that workers respond to the
H - -.1701 -.1502
(5.928) (5.108)
decline in their incomes resulting from shorter
hours by sending other family members out to
W -.0234
(6.125)
seek employment. However, if the downturn
R?2 .6657 .9028 .8823
becomes more severe and leads employers to
S.E.E. .0031 .0017 .0018
Durbin-Watson .7767 2.1471 2.0353
reduce their work forces, it appears that some
job seekers view this as a very bearish market
signal, become discouraged, and withdraw from
the labor force.
order autocorrelation in the residuals, as evi-
We can note further that the trend in equa-
denced by the low Durbin-Watson statistic, but
tion (1.B) is highly significant. Recalling
no effort was made to correct for this since this
equations (7) and (8), we know that the co-
equation was judged inferior in any event to
efficient of the trend reflects both the trend, if
the remaining relations.
any, in the potential participation rate and the
Equations (1.B) and (1.C) in table 1 intro-
trend in average hours. If there is no trend in
duce the cyclical effect of average hours and
the potential participation rate, then the co-
can be discussed together. Note, first of all,
efficient of the trend in (1.B) should be equal
that the inclusion of average hours greatly im-
to the negative of the product of the coefficient
proves the fit of the participation function and
of average hours and the trend rate of growth
also eliminates the autocorrelation in the resid-
in average hours. A simple linear trend fitted to
present in measured labor force, a point stressed by Mincer
postwar average hours indicates a secular de-
(1966). This bias should not be very large, however, in
cline of 0.0079 (thousands of hours) per year,
estimates based on annual data, since the sampling variation
so that the product in question is - (-.1701)
is not as great in annual as in quarterly or monthly data.
Second, we have implicitly treated cyclical variations in
(-.0079) =-.0013, which is indeed very close
employment as exogenous, that is, as determined by the
to the coefficient of the trend in (1.B). Thus,
demand for labor, whereas the actual behavior of both
we can conclude that there is virtually no trend
employment and the labor force may be influenced by
demographic influences on the supply side of the market,
in the potential participation rate and that the
a point stressed by Bowen and Finegan (1969). Bowen
trend in the participation equation is simply
and Finegan recommend the use of some other variable-
picking up the trend in average hours.
the unemployment rate, for example-to capture fluctu-
ations in labor demand. Replacement of the employment/
Utilizing this interpretation of (1.B), we can
population ratio in (1.A) by the unemployment rate was
turn to an examination of (1.C), in which the
found in this study to result in a coefficient on the un-
trend is replaced by the real wage rate. The
employment rate that was not significantly different from
zero. The ultimate thrust of the criticism of Bowen and
real wage carries a highly significant, negative
Finegan is that investigators who use the employment/
coefficient, and, in spite of the slightly lower R2,
population ratio obtain unbelievably large estimates of
equation (1.C) may be preferable to (1.B).
hidden unemployment. Our estimates of hidden unemploy-
ment (see footnote 16), however, are actually in line with
For the small loss in explanatory power over
their own, so that the problem seems to center on the use
the sample period, we obtain a relation that has
of the employment/population ratio alone without taking
greater economic content. The long-term moveaverage hours into account.
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LABOR FORCE AND UNEMPLOYMENT 51
included, 1930 and 1940. Second, we should
ment of average hours and the real wage over
expect the estimated labor force in 1922 to come
the postwar period are closely related.' To the
relatively close to Lebergott's estimate for that
extent that average hours follow the trend in
year, since 1922 is not far in time from 1920, a
the real wage, the hours and wage variables in
census year on which Lebergott's interpolation
(1.C) offset each other. Thus, the influence of
is based, and labor market conditions in 1922
the real wage on potential labor supply is lim-
were not very different from those prevailing
ited largely to its effect on average hours per
in 1920. And, a final criterion should be the
worker. By allowing for the relation between
reasonableness of the behavior of our labor
average hours and the real wage, we might very
force estimates in the remaining intercensoral
well commit smaller errors when using the par-
years, considering other information available.
ticipation equation to make predictions beyond
Labor force estimates for 1922-1940 derived
the sample period. For this reason, equation
from equation (1.C) were found to be far too
(1.C) has been chosen as "the" participation
low throughout the period. The 1930 labor
equation to be used in the subsequent analysis.
force was under-predicted by 2.709 million
persons, and that for 1940 by 3.290 million.
III Labor Force and Unemployment in the
Prewar Period
When the prediction errors are stated in terms
of participation rates, however, we find an en-
Our aggregate labor force participation func-
couraging result. The error for 1930 is 0.0305,
tion fitted to postwar data can be used to obtain
while that for 1940 is 0.0328. These errors are
labor force estimates for the prewar years that
certainly very similar and suggest that if we
incorporate the effects of changing labor mar-
merely adjust the constant term in equation
ket conditions. Data on all of the indepen-
(1.C), we should obtain much better results.
dent variables are available for these years, so
This was done by taking a simple average of
all that is required is to insert the values of the
the participation rate errors in 1930 and 1940
independent variables into the equation, calcu-
and adding the average error to the constant
late the labor force participation rates, and
term. The resulting labor force estimates are
multiply these rates by the working-age popu-
presented in table 2 and are plotted in figure 1,
lation for each year.9 Before presenting the
along with Lebergott's series. Our estimates
results of such calculations for 1922-1940, we
for 1930 and 1940 now, of course, lie very close
should set forth 'the criteria by which the suc-
to the adjusted census figures (Lebergott's
cess or failure of the procedure ought to be
figures for these years), and our estimate for
judged. Perhaps the most stringent test of the
1922 does not differ greatly from Lebergott's.
method is its ability to predict accurately the
The seemingly arbitrary adjustment of the
size of the labor force in the two censuses years
constant term deserves some attention. It has
already been noted that changes in demo-
8A linear regression of average hours on the real wage
for the 1949-1966 period gives the following relation:
graphic factors ought to influence aggregate
H = 1.7693 - .1354 W R2 = .8271.
labor force participation, although the vari-
(9.069)
ation in such variables during the postwar years
If the real wage in equation (1 .C) is capturing only the
was not sufficient to obtain meaningful estitrend in average hours, then the coefficient of the real wage
(-.0234) should equal the negative of the product of the
mates of their impact. Two significant changes
coefficient on average hours and the coefficient of the wage
in the structure of the population occurred be-
in the above equation, -(-.1502) (-.1354) = -.0203.
tween the prewar and postwar years. First, the
This condition holds approximately.
'The employment and population data are from Leber-
proportion of the population 65 years of age and
gott's study (1964). The average hours and wage series are
over rose substantially, from 5.4 per cent in
arrived at by methods described in footnote 5. Govern-
1930 to 9.2 per cent in 1960.10 Since particiment civilian employment data for 1929-1940 are from the
National Income and Product Accounts; the 1922-1928
pation rates for individuals 65 and over have
figures are estimates prepared by Bert G. Hickman and the
generally been well below those for individuals
author. The GNP figures used in estimating the wage rate
for 1922-1928 are estimates derived by Hickman and me.
Since these estimates extend back only to 1922, labor force
predictions could not be obtained for earlier years.
10 See U.S. Dept. of Commerce, Bureau of the Census
(1960, 1965), series A-1 and A-33.
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52 THE REVIEW OF ECONOMICS AND STATISTICS
TABLE 2.-ESTIMATES OF THE CIVILIAN LABOR FORCE
0.304 in 1930 and that for the younger age
AND UNEMPLOYMENT RATE, 1922-1940
group was 0.548,11 so that the labor force in
1930 would have been smaller by about 1.1
Civilian Labor Force Unemployment Rate
(millions of persons) (per cent)
million persons. Hence, the shift in the age
Equation (1.C) Equation (I.C)
Year Lebergott Adjusted Lebergott Adjusted
structure of the population between the prewar
and postwar periods could partially account for
1922 42496 42.765 6.7 7.3
1923 43.444 44.373 2.4 4.5
the underestimates of the prewar labor force
1924 44.235 44.725 5.0 6.0
obtained from our postwar relation.
1925 a 44.934 45.962 2.7 4.9
The second major demographic change was
1926 45.629 46.722 1.8 4.1
1927 46.375 47.220 3.3 5.0
the decline in the proportion of the population
1928 47.105 47.737 4.2 5.5
living on farms, from 24.5 per cent in 1930 to
1929 47.757 48.873 3.2 5.5
7.5 per cent in 1960.12 If labor force parti1930 48.523 48.622 8.9 9.1
cipation rates are higher for the farm popula1931 49.325 47.500 16.3 13.0
1932 50.098 46.842 24.1 18.8
tion than for the nonfarm population, which I
1933 50.882 47.440 25.2 19.8
suspect is the case although I cannot find data
1934 51.650 51.227 22.0 21.3
to verify this, then again we would expect our
1935 52.283 51.754 20.3 19.5
postwar relation to underpredict the prewar
1936 53.019 52.759 17.0 16.6
1937 53.768 53.599 14.3 14.1
labor force. Even a small excess of the farm
1938 54.532 53.676 19.1 17.8
over the nonfarm participation rate would lead
1939 55.218 54.475 17.2 16.0
to sizable underpredictions, since the popula-
1940 55.640 55.526 14.6 14.4
tion shift being considered is so large. Thus, the
a The civilian labor force figure for 1925 in table A-3 of Leber-
gott's study (1964) appears to be incorrect. It is not equal to the
combined effects of these two demographic
total labor force figure minus armed forces. I have assumed that the
total labor force figure is correct and recalculated the civilian labor
changes could alone account for a large part of
force and unemployment rate estimates.
the error in our predictions of the level of the
prewar labor force. There are, undoubtedly,
age 14 to 64, a sizable increase in the propor-
other structural changes in the population which
tion of the population 65 and over will reduce
tend to produce errors in our predictions, some
the aggregate participation rate. To give some
perhaps working in the opposite direction from
idea of the magnitude of the change involved,
the two discussed here; but I have been unable
suppose that the proportion of the population
to discover other changes that might have had
65 and over in 1930 had been 9.2 per cent
a major influence.
rather than 5.4 per cent. There would then have
There are, of course, other factors that could
been an additional elderly population of about
explain, or help to explain, our systematic un-
4.7 million persons and, let us assume, 4.7 mil-
derpredictions of the prewar labor force. Re-
lion fewer persons age 14 to 64. The participa-
calling equation (7), we see that the constant
tion rate for the elderly was approximately
term in the participation equation is equal to
(1 - a5e)al - acbo, where a5 and a6 measure
FIGURE 1. CIVILIAN LABOR FORCE, 192 2-1940
the responses of participation to cyclical vari-
MiI hohs of
ations in employment and average hours, e is
pers ons
S56
the full-employment employment rate as viewed
S5 ~
by workers, and a, and bo are the constant terms
'4 /
'3
in the potential participation equation and the
52 Lebergots tortes
potential average hours equation. The above
arguments regarding structural shifts in the
population indicate that a1 was probably larger
in the prewar than in the postwar period. Since
49 / / \~~~~~~~ ~Adjusted estinsues
46 / from equotlon (I.C)
predictions from our postwar relation appear
44 //
"See U.S. Dept. of Commerce, Bureau of the Census
43 - /
(1960, 1965), series D-14 to D-25 and A-27 to A-33.
42_
12 See U.S. Dept. of Commerce, Bureau of the Census
22 23 24 *25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40
(1960, 1965), Series A-1 and A-38.
Year
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LABOR FORCE AND UNEMPLOYMENT 53
to be off only in terms of their level, there is
reason to believe that the cyclical response co-
efficients a, and a6 in the prewar period were not
very different from those estimated from post-
war data. Thus, the increase in the prewar con-
stant term in the actual participation relation
that cannot be attributed to a rise in a1 must be
due to either a lower full-employment employ-
ment rate or a higher bo. There is little basis
for speculating about changes in bo, although a
smaller proportion of part-time workers in the
prewar labor force might account for a larger
bo in those years. What about e? The possibil-
ity that workers in the prewar years had a less
optimistic view of what constitutes full employ-
ment is intriguing and perhaps even plausible.
We might expect the unemployment rate at
full employment to be higher if workers are less
mobile or if production patterns by industry
and region are changing rapidly because of
shifts in demand or differences among indus-
tries in rates of technical change. Such con-
siderations suggest that if the prewar and post-
war e's differed at all, the former was probably
smaller than the latter.13 This issue certainly
changed.15 Since unemployment rates as low as
2-4 per cent have typically been accompanied
by considerable inflationary pressure in the
United States economy, our higher unemploy-
ment rates appear to be more consistent with
observed wage-price behavior than are Leber-
gott's. It must be admitted, however, that this
decade in our history remains somewhat puz-
zling. If the full-employment unemployment
rate was higher in the prewar than in the post-
war period, as we argued above, then these
higher unemployment rate estimates might still
indicate that a relatively tight labor market ex-
isted during most of the 1920's, thus under-
mining what might appear to be an explanation
of wage-price stability during the period. The
degree of inflationary pressure in the economy
should be more closely related to the difference
between the actual unemployment rate and the
"normal" or full-employment unemployment
rate than to the level of the actual unemploy-
ment rate.
Our labor force estimates fall below Leber-
gott's throughout the 1930's and therefore yield
lower unemployment rate estimates for those
deserves careful study.
years. This is to be expected, since Lebergott's
Returning to our labor force estimates in
table 2, we note first that they exceed Leber-
gott's figures throughout the 1920's and there-
interpolation method utilizes participation rates
from 1930 and 1940, both years of high employ-
ment relative to the deeply depressed years of
fore yield considerably higher estimates of un-
the 1930's. The peak unemployment rate in our
employment rates in these years (see columns
3 and 4 of table 2). For the 1922-1929 period
Lebergott's unemployment rates reach a peak
series occurs in 1934 rather than 1933. This
seems odd since the trough in real GNP is
placed by the Commerce Department in 1933
of 5.0 per cent in 1924 and hit a low of 1.8 per
and Knowles' work (1960) indicates that the
cent in 1926; our series has its peak and trough
trough in the ratio of actual to potential GNP
in the same years, but the levels are 6.0 per
also occurred in 1933. The rise in output in
cent and 4.1 per cent respectively.14 This hap-
1934 was, of course, accompanied by a substan-
pened to be a period of rather remarkable wage
tial increase in employment which leads to an
and price stability; the money wage increased
increase in the size of the labor force but by a
at a rate of only 1.4 per cent per year, the de-
smaller amount than the increase in employ-
flator for consumer expenditures decreased
ment. Thus, one would think that the unem-
slightly at a rate of 0.1 per cent per year, and
ployment rate should have declined. However,
the deflator for GNP remained practically un-
there was a dramatic decline in average hours
in 1934, no doubt due in large part to federal
13 Calculation of the possible magnitude by which the
wage-and-hours legislation that went into effect
postwar e exceeds the prewar e is complicated and risky,
since at a minimum it requires an estimate of a, the con-
in that year. According to our participation re-
stant term in the potential participation relation.
lation, a reduction in average hours also leads to
14 Our estimates of unemployment in the 1920's come
an enlargement in the labor force, and it is this
closer to those of Daniel Carson and Meredith Givens than
to Lebergott's. See Lebergott's study (1957) in which he
compares various estimates of unemployment for this
15 These figures are derived from the Hickman-Coen esti-
period.
mates of the underlying series for the period 1922-1928.
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54 THE REVIEW OF ECONOMICS AND STATISTICS
factor which accounts for the unemployment
to employment and hours evidenced in the post-
rate peak in 1934.
war data give sensible predictions of cyclical
changes in the prewar era. Our systematic
IV Conclusions
underestimation of the prewar labor force can
be partially explained by differences in the
Our examination of the determinants of
structure of the population between the prewar
labor force participation in the postwar pe-
and postwar periods, but underestimation might
riod has turned up several new findings. Both
also have resulted from workers' expectations
armed forces and cyclical variations in average
of a higher normal unemployment rate in the
hours per worker, variables which have gener-
prewar years than in the postwar years. Esti-
ally been ignored in previous studies, appear
mates of prewar unemployment rates derived
to have significant effects on participation. The
from our adjusted labor force predictions sug-
added-worker response to average hours tends
gest that contrary to Lebergott's findings and
to moderate cyclical changes in participation
the views of many economists, the din of the
that would be predicted from participation re-
"Roaring Twenties" may have included a few
lations which include only an employment
whimpers from workers. In five of the eight
variable. Hence, estimates of the number of dis-
years from 1922 to 1929, the unemployment
couraged workers and of so-called hidden
rate exceeded 5 per cent, and in one remaining
unemployment based on our participation re-
year it was just a shade under 5 per cent. Our
lation are considerably smaller than those
results present few fresh insights into the
derived by most other investigators."6 The in-
1930's, although they locate the peak unem-
fluence of the real wage on long-run labor sup-
ployment rate in 1934 rather than 1933. These
ply decisions appears to be confined to its role
new estimates of labor force and unemploy-
in determining desired hours of work; potential
ment should prove superior to those currently
participation is virtually unaffected by the real
available in studies of wage-price behavior and
wage. Finally, our careful derivation of the
potential output in the prewar years.
participation equation indicates that many of
the underlying parameters of interest cannot be
REFERENCES
identified from estimates of the equation. How-
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(Aug. 1971).
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All use subject to JSTOR Terms and Conditions