I would suggest to the committee that the basic reason for this marked departure from past patterns is that powerful forces other than the familiar business cycle are presently at work in the economy and especially in the labor market.

I hope that I can be permitted to point out that I was fortunate enough to forecast some of these developments in some testimony that I presented in March 1970, about 18 months ago, to two other congressional committees. I predicted at that time a sharp rise in the unemployment rate, which then was at 4.2 percent, and I also predicted that the higher rate would be surprisingly persistent. My "relatively optimistic" prediction was that the rate would be about 6 percent by the middle of 1971. And my "relatively pessimistic" forecast was a rate of 7 to 8 percent by mid-1971. The 6 percent rate appeared sooner, of course, than my relatively optimistic forceast, but I think that the prediction that the rate would be surprisingly persistent has proved to be quite accurate.

At the time of that testimony, the Council of Economic Advisers was still defending its forecast that the average unemployment rate for calendar 1970 would be 4.3 percent, a figure, of course, which turned out to be far wide of the mark. One of the members of the Council was characterizing the rise above the 4-percent level as simply a transitional problem and presumably one that would disappear fairly promptly.

I think it is fair to say that the great majority of professional economists agreed with Council at that time. I am not saying this merely for the purpose or pleasure of being able to say, "I told you so." The more basic point is that there are two sharply conflicting views about what happened to unemployment in this country during the 1960's. And this, in turn, refers back to some differences about what was causing high unemployment in the early 1960's.

My view is shared by a few others. I think that the majority view is the one expressed by the Council.

Let me summarize very briefly what I call, "the conventional wisdom" about what happened to unemployment in the 1960's. I have analyzed it in some detail in my prepared statement, but I think it can be summarized quite simply by saying that the conventional view is unemployment at the beginning of the 1960's, in 1963, stood at about 512 percent; there was an enormous stimulation of aggregate demand by tax cutting first, and then by expansion of defense spending; this expansion of demand brought about a great decline in the unemployment rate, all the way down to 312 percent. A very simple cause-andeffect relationship. The lesson of this period is quite clear. The only thing, absolutely the only thing, that is necessary to reduce the unemployment rate, if that is your sole or most important domestic goal, the only thing necessary to reduce that unemployment rate to at least 312 percent is to provide adequate stimulation of aggregate demand.

In my view, that is a fallacious analysis. It is excessively simplistic in that it assumes that the only factor, the only significant factor, that

was affecting the unemployment rate was the rapid growth of aggregate demand from 1964, or 1965, on through to the end of the decade.

I think it can be quite clearly demonstrated that there were other major factors that accounted for more of the reduction in the unemployment rate than did the growth of aggregate demand. I will not detail these other factors, but simply mention them.

The first of these factors was two significant changes in the definition of "unemployment." One came in 1965. It involved switching from the unemployed category to the employed category those people, several hundred thousand of them ultimately who were enrolled in certain manpower programs and who in the past had been counted among the unemployed. By 1969 this change had reduced the overall unemployment rate by five-tenths of a percentage point and had had a particularly large effect on the specific rates for certain groups, particularly black teenagers.

There was another change in definitions in January 1967, which, among other things, involved a tightening up of the definition of "seeking work." And according to the Bureau of Labor Statistics that this set of changes-including the dropping of 14- and 15-year-olds from the labor force-had the effect of reducing the overall rate by about two-tenths of a percentage point. In other words, these two definition changes combined reduced the unemployment rate by seven-tenths of a percentage point.

This is a fact that is very frequently overlooked in discussions and, particularly, in comparisons with earlier periods. If we took the pre1965 definitions for today's unemployment rate of 5.8, the rate actually would be 6.5 percent. In his press conference earlier this week, the President pointed out with some satisfaction that the unemployment rate today is lower than it was in 1962 and 1963, when it was up around 6 percent. Well, actually, if you use the same yardstick today's unemployment rate is substantially higher than the unemployment rate of 1962 and 1963.

The second factor that reduced unemployment in the 1960's, was the withdrawal of a maximum of about 900,000 young men from civilian life into the Armed Forces. My estimate, without going into any of the details, is that that factor by itself had an effect of about six-tenths of a percentage point on the national unemployment rate. So from 1964 to the low point in 1969, there was a reduction of 2 full percentage points in the national unemployment rate. These factors that I have just discussed, together, counted for a total of 1.3 percentage points of that reduction in the unemployment rate, so that the residual is only seven-tenths of a percentage point. It can be argued, and I think not unreasonably, that if demand expansion had been the only factor affecting the unemployment rate in the 1960's, it probably would have fallen no lower than 4.8 percent.

Now, I mentioned some other factors that I think had a significant effect a little more on the composition of unemployment perhaps than on the overall unemployment rate. One of those factors is the high proportion of blue-collar jobs involved in defense work. About 60 percent of the jobs created by higher defense spending were bluecollar jobs, whereas in the economy as a whole, only about 40 percent

of the jobs are blue-collar jobs. The significance of this is that the bluecollar workers in manufacturing were the ones who had been hard hit by the longrun trends in the economy that I mentioned somewhat earlier. They were the ones most benefited by the increase in defense spending and, of course, they are now the ones who are being particularly adversely affected by the cutbacks in defense spending.

That brings me to the recent rise in unemployment. I think the factors involved here can be rather quickly summarized. They are probably fairly familiar. The first of these is the reduction in the size of the Armed Forces. The Armed Forces have been drawn down to a level about 800,000 below the peak level in 1968, and the present level of Armed Forces is only 100,000 men above pre-Vietnam level. The second factor is the massive layoffs and dismissals from defense plants as a result of the spending cutbacks.

The third factor is the much slower or zero growth of the manpower programs that were expanding during the mid-1960's.

Now, I emphasize these factors simply because they are factors over and above and unrelated to the normal cyclical patterns, that many people assume are the only things that work today. We have these added factors and I think they account for a good deal of the unusual, the highly unusual persistence of high unemployment following a turning point in the conventional recession.

I have here a discussion of hidden unemployment. Mr. Ginsburg has already covered this matter. I will not repeat what he has said on that point, other than to make one rather important point, which is that the rise in hidden unemployment in my judgment has been particularly marked among nonwhite workers. We have had a good deal of emphasis in the last year or so on the fact that the nonwhite-white unemployment ratio has dropped below the 2 to 1 relationship that had prevailed since the early 1950's. And for calendar 1970, the ratio was 1.8, rather than 2 or above. My calculations show, and I think on a fairly conservative estimating basis, that this change in the ratio is due entirely to an increase, a differential increase, in hidden unemployment among the nonwhites. If you correct for the growth of hidden unemployment among the nonwhites, this ratio for 1970 increases from 1.8, which is the official reported figure, to 2.6. So this particular kind of racial inequality is not disappearing. If you take into account the hidden unemployment it is worsening instead of improving. Just a few words about the policy implications of what I have said here. It seems to me passivity in employment policy has gained a degree of acceptance in high circles. One must concede that there has not been a total lack of activity in the administration and certainly that is not true of Congress. But the basic assumption in the administration, I believe, is that "natural forces" will clear away excess unemployment if we just wait long enough. The unemployed veterans and displaced defense workers will be absorbed in a year or two.

And I say these were the groups, these veterans and defense workers were taken very largely from the groups that were having the hardest time finding jobs in the early 1960's. There is no evidence that I see that these people are going to have any easier time in the early

1970's in finding other jobs, than the time that they had in the early 1960's.

I make the second point that simply waiting for the problem to go away is not usually a very effective method of dealing with the problem. I point to the matter of the sharp rise in the unemployment rate of 20- to 24-year-olds. This reflects the teenage unemployment problem of the 1960's, which has grown a little older. That is what it is. The 20- to 24-age group had, in May 1971, the highest unemployment rate that it has had in any postwar month with the sole exception of the very bottom of the 1957-58 recession.

This, I think, means that we really did not solve the teenage unemployment problem in the 1960's. We simply allowed it to grow older. And I observe that time really does not really solve most problems; it only makes them older and it makes us more complacent about them. My final observation is that I think there is a policy trap in the belief that we have now discovered and tested the ultimate weapon against unemployment, and that is sufficiently vigorous fiscal and monetary policy. I believe, of course, one thing wrong with that, even if it were the ultimate weapon, the thing wrong with it is we are unable to use it right now. The threat of even faster inflation bars the use of what many people regard as this great weapon. But the fact that this is supposed to be the best weapon is sometimes used as another current justification for passivity in employment policy.

Now, I do not say that fiscal and monetary policy have no role to play in reducing unemployment. But I do argue that it is a mistake to make fiscal and monetary policies the centerpiece of employment policy. By the same token, I think it would be a serious mistake to make manpower retraining or public service employment or any other one program the centerpiece of the employment policy. I think there is some analogy with the views of the medical men today that cancer is really a whole family of diseases that must be fought with a variety of treatments. In the same way, I think we need to see that unemployment is a complex problem for which we lack any one sovereign remedy. Economic growth will cure some cases but it will leave others untouched. Retraining is the best treatment for some kinds of unemployment, but it is useless for some. And in many cases we will need subsidized unemployment of one kind or another.

The greatest weakness, I think, in our array of manpower programs at the present time is that all of them, without any exception that I know about, provide slots for only a pitifully small fraction of those who really are eligible under the terms of the programs. I would point out to you that that weakness is particularly apparent in the newly enacted Public Service Employment program, which I enthusiastically supported. However, this new program will provide a maximum of about 173,000 slots in this fiscal year, and there will be several million workers who will be eligible for them.

I conclude with the thought that the trouble today with the rules of economics-referred to by Mr. Arthur Burns in his appearance last month before this committee-the trouble with the rules of economics is that we have tried to apply the unchanged rules of the past to a greatly changed world. I suspect that John Maynard Keynes himself would protest against some of the applications that are being

made of his doctrines today. Even 35 years ago, Keynes had a keener appreciation of the limitations of his analysis and policy prescriptions than some of his recently converted disciplines of today. (The prepared statement of Mr. Killingsworth follows:)

PREPARED STATEMENT OF CHARLES C. KILLINGSWORTH

I wish to thank the Joint Economic Committee for the invitation to participate in this important series of hearings on unemployment. Rarely in modern times has the discussion of our national unemployment problem seemed as confused as in the past 18 months. Administration spokesmen have fairly consistently found something encouraging in the monthly reports on employment and unemployment, while technicians and spokesmen for private groups have often contradicted the Administration interpretations. The Joint Economic Committee is performing an important public service by holding these monthly hearings and thus providing a forum in which not only Administration figures and government technicians but private researchers may assess the significance of the latest figures and suggest the meaning of the longer-term trends.

In my statement this morning, I propose to deal with the unemployment problem from a longer time perspective than is usual. The reason for this approach is simply that I believe that a substantial part of the present excessive unemployment is the reappearance of some long-run problems that were temporarily deferred or masked in the latter half of the 1960's, partly by the Vietnam War and partly by other factors. In the 1950's and the early 1960's, the growth pattern of our affluent society were creating structural changes in the economy which, in turn, created serious problems of imbalance in our labor markets. The Vietnam War and the rapid expansion of some new social programs temporarily offset the effects of those structural changes. Now the winding-down of the war and much slower growth of the social programs are permitting those growth patterns to reassert their profound effects in our labor markets. Unless we understand that our excessive unemployment is the product of a complex combination of causes, there is real danger of excessive reliance on a single remedy which can reach only some of the causes. The course seems likely to prolong the unusual combination of unacceptable rates of inflation and exessive rates of unemployment which now afflicts us.

RECOVERY PATTERNS IN FOUR POSTWAR BUSINESS CYCLES

"The rules of economics are not working in quite the way they used to," commented Chairman Arthur F. Burns when he appeared before this Committee last month. His comment is applicable to a broader range of developments than he discussed. I want to point out two important respects in which the present recovery pattern differs from earlier recoveries in the past quarter-century. I will deal with the aggregate unemployment rate and total employment in manufacturing.

One of the soothing thoughts relied by some analysts in recent months has been that reductions in the national unemployment rate always lag behind recovery in other sectors of the economy after a turning point has been reached. Time is now running out on that explanation for the persistence of high unemployment today. Table 1 presents the data relevant to this point. It is indeed true that the unemployment rate has tended to remain high for several months after the turning point of the recession. But in each of the first three postwar recessions (1948-49, 1953-54, and 1957-58), the unemployment rate has dropped by at least a full percentage point within seven months after recovery had begun. In our current recovery, there is no clear evidence as yet of any downward trend in the unemployment rate. (Here I am accepting the judgment of most technical experts that the reported rate of 5.6 percent for June, 1971 was unduly low because of unusual seasonal adjustment problems and the timing of the household survey.) Only in the 1960-61 recovery did the unemployment rate remain so close to the recession high. And that recovery was the feeblest of the postwar era (up to that time). Even in 1962, the unemployment rate remained in the 5.5 to 6.0 percent range. It was this development that stimulated a rather intense debate concerning the causes of high unemployment even during prosperous times. The current persistence of high unemployment many months

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