HOOtA . • v . THE EFFECT OF .THE DEFENSE PROGRAM OH U1C120PL0YISET ^To<^c] Industrial- production has exceeded the 1929 peak "by 25 per- •* • 1 • • . . .. f ■ ■ cent "but' employment has lagged. Honagricultural employment moved-slightly ahove the 1929, peal" for the first time in April. Meanwhile, the labor supply.'has increased "by approximately 7 million since 1929. Those are the "basic facts that account for the problem of-unemployment and need. .Unemployment in -April 1941 is variously ostimatcd at levels ranging up to more -than-8 million. . . . There us a. widespread imprc.ssion that the problem of unem¬ ployment and need is- rapidly.disappearing under the impact of * • t- » ' defense expenditures. The effect of the defense program on un¬ employment will depend upon.(l) the extent to which production increases; (2) the amount of employment that is provided by i ' this•increase in production; and (3)■changes in the labor sup¬ ply.. The level of output will determine .the volume of cmrploy- • -mcnt. There are various obstacles to increases in output that 'operate as drags on the rate-of. reemployment. It is the pur¬ pose of. this analysis to outline those various obstacles in order to suggest why the transition to full employment cannot be achieved within a' few months, in spite of the billions that have been appropriated for armaments. Factors Affecting Expansion of Output Bottlenecks t ... • , According to reports received by the National Industrial A3 829 2 Conforc'acsq Board from moro than 200 loading companios, manufac¬ turers wore alroady operating at 98 percent of capacity by tho end of March. Tho level of' industrial production during fis¬ cal 1942 -will' bo seriously affCctfcd by bottlenecks, Tho plac¬ ing-of. oyer. $14 billion of ordors for armaments on top of ex¬ isting- demand has-' resulted in capacity shortages in certain crucial fields of production. Bottlenecks already exist in * the following fields; •machine tools, shipbuilding capacity, shipping facilities," skilled labor, plane engines, steel, alu¬ minum, magnesium, nickel, ncoprcne, zinc, and copper. Bottle- nocks arc likely to appear in certain other fields, including railroad equipment, electric power, and imports from tho Far East. Since production has reached capacity in the important fields enumerated above, substantial increases in industrial output must wait upon additions' to plant and upon measures to incrop.sc the supply of certain essential raw materials (espe¬ cially minerals, such as copper, nickel, and zinc). The in¬ terdependence, of industrial activity diffuses tho effects of doleys duo to bottlenecks and the result' is a general drag upon expansion of output. Steel has been cc.lled "the noodle's eye through which tho country's whole economy has to pass." The first Dunn report holding stool capacity to be adequate has already beon sup¬ planted by a second roport predicting a deficit of 1.4 million tons in 1941 and 6,4 million tons in 1942, Dunn's estimate of A2829 3 steel capacity is probably too hig^i and his estimate of . total requirements is probably too low. All indications are that civilian consumption of steel will be severely restricted. The steel situation is perhaps the most important of numerous in¬ dications that the volume of indirect employment that might othewise be expected to result from defense expenditures will probably fall far short of optimistic expectations. On March 1, 1941 the Federal Power Commission said that the electric power industry should increase its proposed ex¬ pansion of generating capacity by more than 26 percent during 1942, This further, enlargement of the industry's expansion plans ivill bo noccssary to meet powor demands for defense pur¬ poses, especially in six critical areas. The Commission in>— plied that thus far the industry has far underestimated the demands which will be put upon it and warned that continuation / of this underestimation might bring serious trouble. Aluminum alone will bo requiring 500,000 more kilowatts by midsummer than it did in 1939, or enough for a city of over 1 million people. Since the Commission's study was. completed^ both tho dofonso program and aid to Britain have been expanded. More¬ over, it tokos from 18 months to 3 years to install generat¬ ing facilities and the current backlog of unfilled orders for oloctrical equipment may provent installation at the normal rate. Capacity operations have boon reached in a growing number ©f raw-material industries. As early as March 20, plant shut- A2829 4 downs were occurring in the automobile industry because of the metal situation. Shortages of essential materials is causing some curtailment of 1941 modol production and will necessitate mere drastic retrenchment in 1942 models. Supplies of critical materials are being expanded but indications arc that there vail not bo enough of these materials to meet both civilian and defense needs. Production of consumer goods will probo- bly be affected to an increasing, oxtent with a resultant drag on the rate of reemployment. There have been no significant additions to the supply of skilled metal workers, machinists, and tool—and-dio makers. Shortages in those occupations, together with shortages of mana¬ gerial skills, have contributed greatly to delays in produc¬ tion. Training activities have increased considerably but the reported number of onrollocs and graduates falls considerably short of estimated nocds. Many of tho thousands of skilled workers who will be sought daring the next few months will net be available unloss there are radical now developments in training, upgrading, and simplification of production processes. The Problem of Obtaining Extension of Capacity Expansion of plant capacity in bottloynock areas is neces¬ sary in order to unleash the nation's full power to produce. Delay in obtaining the required plant expansion arises basic¬ ally from the fear of excess capacity during tho post-dofenso period. To the extent that tho expanded facilities arc not required for peacetime production during tho post-defense po- A2829 5 riod, private capital invested in defense plants will be sub¬ ject to losses.. Between 1915 and 1919, ''industry expanded its plants. When hostilities ceased, manufacturers were haunted by overcapacity. Likewise, businessmen remember the high proportion of plant fa¬ cilities that was idle during the 1930Vs. Accordingly, the practice of utilizing increased earnings to repay debt., retire"' preferred shares, and "build up working capital rather than to finance oxpansion is being widely favored. The problem, there-, fore, is to persuade businessmen to act in terms of an expand¬ ing economy. The difficulty of expanding capacity is also related to the monopoly quostion. Concentration and monopoly play important roles in-dotormining the volume of.. investment, and such condi¬ tions arc especially pronounced in certain fields where plant oxpansion is required by the defense program. In industries domi¬ nated by one or a few corporate grants with high fixed costs, * "' * certain lines of consumers' goods, Tho.fipst shortages ..of parts and ma.torials duo to defense priorities bogan to, curtail auto¬ mobile production during the first week of March, Virtual shut¬ downs were reported in some small supplying plants unable to ob¬ tain aluminum, nickel, or zinc. Automobile plants were no longer- able to got all the steel thoy wanted, and this. fact, alone made • ; • ' .... v..*. it impossible for the industry to schedule 600,000 units for March as it would have wished to. do, Key, men .were steadily * . ~ i - "r>'' '« '• f "" o * being transferred to defense jobs. According, to., the. trade jour- nal Stool, it is oxpoctcd that before.the.labor demands of new defense plants become important, a considerable.volume of. auto— *r. '* ' *t-1 ' ' ' ®" mobile labor will have to bo released bocauso of, materials short— ages. In March, the 0PM announced that an.organization would be sot up to deal with the problem of labor displacement arising, out of the priority program with the first task to bo.considered that of displacements caused by the allocation of aluminum from, civilian to dofonse industries. Reports from other sources indicate that defense demands for various typos of r.ctals, woods, and other basic materialS:.with- 10 high ■priority ratings threaten 'a shortage in the home-furnishings industry. If such shortages develop and adequate substitutes are not available, not only will current employment levels fail to be maintained — there will be an actual drop in output and employment in this field. Curtailment of civilian—goods output could have been largely avoided by earlier expansion of capacity in bottleneck areas. But industry has been relxictant to expand. As defense expendi¬ tures increase during the coming fiscal year, additional civilian- goods" industries will be forced to curtail output and employment because they cannot obtain materials. the extent that the list of priorities is expanded, increases in armaments produc¬ tion will be at the expense of civilian production so that in¬ creases in arms output5and employment will not be not gains. n 3?or this reason, total employment will increase more slowlyv ' Now "that priorities have boon resorted to, there is the , A further danger that emphasis will swing from addition of now plant capacity to shifts in the use made of existing plants. If, instead of building new plants to meet the increased de¬ mand, plants now engaged in producing civilian goods shift to the manufacture of armaments, the offoct will bo to freeze out¬ put and employment at existing levels and a large volume of un¬ employment will "persist even a.t the height of the defense pro¬ gram. gyictional Maladjustmentg, Cortain optimistic ostimatos of reemployment during fiscal A2829 1942 have failed to make adequate allowanco for certain inevi¬ table frictiohal--maladjustments: (l) In the first place, the nation's industries that ha/e "been geared for satisfying only peace-time needs mus-t quickly "bo redirected to produce a maxi— mom of armaments, and such structural adjustments are time- consuming; (2) - the difficulties of "bringing all available ca— pacity into defense production involve a tremendous management problem; (3) tho' accumulation of excessive inventories (to guard against prico rises and shortages) moans maldistribution of ma¬ terials and delays in tho expansion of total output; (4) serious maladjustments*are imposod upon both industry and agriculture by the los-s of export markets. Structural adjustments arc time-consuming- Tho inaugurate of tho- defense program has meant a violent and rapid change in the objectives of the country's productive organization. To a large extent, armaments mean that American industry is called upon to produce now products. In many cases, the handling of defense contracts involves only"relatively simple conversions - •> /• • swords can be made in plow factories. Any shift in the direc¬ tion of production, howover, inevitably involves maladjustments that arc time-consuming. Because tanks and locomotives are both heavy vehicles ria&o of steel, it is far too easy to assume that a shop exporioncod in making the one can turn to the other. But oven for a diversified and resourceful engineering s'taff, the transformation takes a long time. Eventually, machino guns wi'll bo produced by companies for- A2829 12 merly manufacturing refrigerators, gears, electric lights, and spark plugs (among other things). But munitions are infinitely more complex than peace-time machines and very few of them lend themselves to the methods of the assembly line. Unaccustomed material's and parts must flow in vast quantities along new routes. Innumerable frictions and delays naturally develop in this flow. Delays in the arrival of new equipment and shortages of mat¬ erials havo the effect of postponing hirings. Scarcity of si>- pervisory help and essential skilled workers delays the hiring of other workers. Many months must pass before the new channels of goods in process are free of serious obstructions, The Don- don Economist reports that it took something like 4 years of planning before the curve of aircraft production really began to rise in Great Britain, and a still longer period for army ordi¬ nance. Even a standardized merchant ship takes a year or 18 months to build when tho yards have first to bo laid down anew or brought back into service. Even after the initial tooling-up is accomplished and large- scale production of armamonts has begun* "bugs" creep in. New plants are coming into production month by month, and production in those individual plants cannot bo expected to move smoothly at the outset. For instance, priorities do not enter calcula*- tions; instead, it is expected that materials and parts will arrive as needed. Preliminary planning does not e.llow for tem¬ porary shortages of skilled labor that interfere with the smooth flow of goods in process. By March, with tooling-up substan- A2829 tially accomplished, the allocation of supplies — getting mate¬ rials whero. they ajro neodod at thp right time — had become a major problem, ; • The concentration of defense production in comparatively fe\* areas has raised series problems concerning the geographical' availability of labor. Enormously expanded-produbtion and em¬ ployment in these few areas moans the hurried_transplanting into congested centers of thousands of pooplo. Great housing projects must bo. undertaken and the necessary community serv¬ ices must be provided for these new populations. Housing.short¬ ages in certain localities constituto deterrents to further omploynont until new hones can be built. Labor turnover bor-. cones excessive because porkers arc unable to find satisfac¬ tory living quarters for their families and this reduces out¬ put, At the samo tine, in other connunities many productive . . . facilities are only partly used and labor is unonploye'd. It is problems of this sort that are involved in the.state¬ ment that structural adjustments arc tino-consuning, , Difficulties in bringing all available canrnitv into opera¬ tion^. The bulk of defense contracts has been awarded to a com¬ paratively small-number of industrial concerns. Orders have been pilod on the larger concerns for at least tjr/o reasons: (l) thoy havo tho facilities and established managerial^ability to handle large orders; (2) it is easier to deal with a United number of largo concerns than with thousands of smaller ones. It would probably have taken months longer to break'contracts down into A2829 14 parts and nogotiatc with numorous smaller concerns, In tho early months of the dofenso program, tho Array and Navy turned to the manufacturers whora they know and had previously done business with. That was the quickest way to got started, Or— dors for ships had to he placed with tho comparatively few ex¬ isting shipyards. Contracts for airplane engines had to ho assigned at first to the two or three companies that were ahlc at the tine to assume the responsibility. Orders for tanks, guns, and ammunition have boon allocated to a few companies that wore familiar with tho techniques or could most readily acquire them. Thus, while 511 concerns received prime contracts of $100 thousand or more during the last half of 1940, 114 of thcso_ac¬ counted for 95 percent of the total ($6,7 billion out of $7,0 billion). Sixty-eight companies had received about two-thirds of the $14,2 billion of defense contracts lot by March 14, Es¬ timates made, for the 0PM indicate that more than 200 thousand primary contractors arc available for dofenso work. By last March scarcely more than 13 thousand had received orders. More than 80 percent of defense contracts had gone to 10 States while 4 States (California, Nov/ York, New Jersey, Pennsylvania) had received nearly $5 billion. The "farning-out" problem., Further substantial increases In tho output of armaments depends not only upon oxpansion of capacity in bottleneck areas but also upon enlistment of a much larger proportion of available productive facilities in tho A28h9 defense effort. The nation has scoros of giant conpnnics but ^ * it also has many thousands of snail notal—working conpanios. 'The conpanios that have rocoivod dofenso contracts roprosent only a snail proportion of the. country1s productive equipment and labor supply that could bp adapted for defense production. If we are. to produce the voluno- of ornaments of which we are potentially capable, it.is essential for defense .work to bo noro widoly disporsed. The farning out of defense work in bits and pieces is necessary in order to utilize the full nan- «r power and machine pov;or of American industry. There arc ef¬ ficient snail plants whose facilities .are being, cnploycd only partially. Many of those are in industries where production is reported to bo pressing upon capacity. In the face of reports of shortages of nachinc tools for defense plants, for instance, ;it was ostinatcd that by last March fully 50 percent of the country*s available nachinc tpols were cither idle or being employed only 8 hours a day. It will be an exceedingly difficult management: problem to obtain the maximum possible use of these tools. • Farming out must bo accomplished promptly if defense pro¬ duction is to gathor real momentum - if output and employment arc to rise in accordance with optimistic predictions. It is roportod that farming out in Germany has been practiced to the extent that even workers on farms have, been provided with n> chinory for turning out snail parts to go.into tanks ana planes. The obstacles to bringing idle facilities into defense pro- A2829 16 auction arc numerous. The work nay be unfamiliar, even to the urine contractor. The bottleneck parts arc sometiqcs the nost difficult to' make. As In the case of airplane engines and ma¬ chine' tools, standards nay be exceedingly precise. Many pri¬ mary contractors do not know where to' find concerns to which to subcontract parts. And many sna.ll concerns do not know how to get subcontracts or what kinds of parts arc required that arc within their capacity to r.ialcc» Innumerable tino— ccnsuning sub- contractual arrangements arc-necessary. Problems of equipment and financing must be solved. New management relations must be established. Large-' concerns that have received defense con¬ tracts a.rc naturally reluctant to share their profits. In Great Britain, the big contractors were reluctant to re¬ sort to the bits and pieces system but the shock of the French collapse greatly accelerated the process by pointing up the ne¬ cessity for utilizing the nation's■entire productive nachincty. Farming out is often more expensive than producing in the home plant, In this connection, however, a statement of British policy is significant: "This nay entail an increase in costs at the present time, but in the'long run it will be choa.pcr to pay more for supplies which can be produced now than to practice a false economy which nay only, produce them too late." Full utilization of small plants has boon slow to be achieved. This is a considerable part of the explanation why expansion pro¬ ceeds at a slower and -slower rate. Idle capacity in the st'Ocl industry. Defense orders for A2829 17 steel have "been distributed in helter-skelter fashion. Large steel firms are overloaded with orders while smaller firms are operating their open-hearth departments far below capacity. Overtaxed and idle facilities are found side "by side but in different companies because of the illogical distribution of orders end the lack of coordination. Each company is operating as a separate entity and is ac¬ cumulating the largest possible backlog of orders in order to assure profitable operations far into the future. Prosppctive shortages of steel will bo even more serious unless the indus¬ try is organized into a single production unit so that all available capacity will be utilized to the best advantage. Idle cauacitv in the auto industry. The automobile indus¬ try as a whole is not using more than 50 percent of its maxi¬ mum potential capacity if that capacity were properly coordi¬ nated and operated to the fullest degree. Luring the automo¬ tive year ending last August, Nash used only 17 percent of its pro¬ ductive capacity; Lodge used 36-];- percent. Chevrolet, the larg¬ est single producer, turned out over a million 1S40 models by using less than 50 -oercent of its potential productive capacity. The automobile industry has the largest reservoir of skilled labor in the world. Luring the past 5 years more than half of the tool and die makers in the industry (or more than 10,000) averaged loss than 6 months v-ork per year. The full productive capacity of the automobile industry cannot be utilized for dc- fonse until its production curve is flattened out. A2829 18 It has "been maintained that it is possible, by special jigs and fixtures, to adapt idle automotive equipment to quantity production of plane parts. At last report, this proposition was still in the controversial stage. Regardless of the out¬ come* of this controversy, the extent of idle capacity in the automobile industry is an outstanding illustration of the dif¬ ficulties that are involved in the attempt to bring the nation'•; idle men and machines into active production for the defense program. Accumulation of excessive inventories. Another type of frictional maladjustment is the accumulation of excessive in¬ ventories. Stocks have been accumulated against possible price increases and against possible future shortages and priorities. During the last quarter of 1940, holdings rose at the rate of $250 million per month. The Government has found on investigation that plants en¬ gaged in both private and defense work were heavily overstocked with strategic materials. Even companies producing civilian goods, for instance, were discovered to have stocks of aluminum to cover their needs for 6 to 8 months in ad.vance. 3y last February, forward buying had begun to interfere with the flow of materials for defense needs. The retarding effect of genuine shortages has thus been exaggerated by the creation of artificial shortages. The introduction of priori¬ ties in certain industries was hastened by this situation. On May 1, viie Priorities Division imposed a special form of invon- i- >829 19 tory control on 1£ metals and classes of metals in an attempt to prevent the building.up of industrial inventories to excess ive levels. Control of private inventories of strategic raw materials has become one of the primrry issues of the defense program. Loss of oxrport markets. In contrast with what happened during 1914-1913, the current war has damaged our agricultural export trade. "The continental European blockade has deprived us of a market that formerly took one-third of our farm ex¬ ports, or products from approximately 12 million acres. The loss of export markets will bo felt most acutely in areas pro¬ ducing cotton, flue-cured tobacco, wheat, and certain-classes of fruit. To continue to grow unneeded crops is sheer waste of pro¬ ductive' facilities. Some major shifts in the direction of agr cultural production are indicated. Agriculture thus provides a major example" of time-consuming structural adjustments that are necessary before the nation's productive facilities are fully *employed in a manner that will maximize the defense ef¬ fort. Loss of export markets has also had adverse effects on ill dustry. 'Chile the total volume of exports has' held up fairly well, the composition of exports has shifted radically. A vastly greater proportion of the total is now made up' of arma¬ ments. Industries formerly doing a* substantial export busi¬ ness have suffered serious loss of' market's in this shift. Cur A2829" 20 tailment of production has been necessary in these fields un¬ til substitute markets or products can be discovered. The Volume of Employment The Effect of Increasing Productivity For many years, technological improvement has been fairly continuous. In industry after industry, the manpower required per unit of product has been constantly reduced. This means that a thousand tanks, a hundred ships, or a million uniforms require fewer workers to produce than was required 10 years ago and many fewer than was required 25 years ago. Man-hour productivity in all manufacturing was 40 percent higher in 1S40 than in 1929. In the railroad industry, the increrse from 192S to 1939 was 40 percent; in electric light and power, 76 percent. In the iron and steel industry, out¬ put per man-hour increased 166 percent between 1919 and 1S39. Productivity has also increased in agriculture. Recentlw, the Department of Agriculture stated that "normal requirements in farm production ... can now be met by approximately 1.6 mil¬ lion fewer workers on farms than in 1929. ..." Industrial production increased 32 percent between January 1S2S and January 1941 while manufacturing employment increased only 13 percent. Employment lagged behind production to this extent in spite of a decline in average hours worked per week from about 48 to about 40. If hours had not declined during this period, employment would have lagged still farther behind production. A2829 21 If production is to increase substantially from the present level/ new capital facilities must be built. These additioas- to plant and equipment will embody the most advanced techno- logical improvements. As a result, we may expect continuing increases in the productivity of labor so that manufacturing employment will lag still farther behind production. Although there are more persons in the labor supply in 1941 than in 1929, we need fewer workers to produce a given quantity of real income. Under the defense program, the pro¬ duction of goods will reach new high levels. But because of increased productivity, employment will not.keep pace with this increased output. The Factor of Part-Time Employment There is an additiona,l reason why employment may be ex¬ pected to lag behind production. Increased production is be¬ ing achieved by lengthening the hours worked by those already employed. In April there were 4.2 million workers employed less than 30 hours.per week; 3.9;million were employed between 30 and 39 hours. Plants now on part-time will employ their workers for a full -work week before, they add now workers to pay rolls. If hours of labor were to increase to the 1929 .level', production could increaso at least one-fifth above the 1940 average without the employment of any additional workers. The Bureau of Labor Statistics has attempted to calculate the total number of man-years of labor that defense appropria¬ tions will require. Such a total, however, will not mean a cor- A2829 22 responding increase in the number of workers employed. For ex¬ ample, defense contracts totaling $1 billion may mean 500,000 man-years of employment, but this does not mean that 500,600 new workers will be added to pay rolls. Instead, a substantial part of these 500,000 man-years of employment will be allotted to workers already on pay rolls by lengthening the work week. Employment in Defense Industries Employment in the 15 key defense industries in April 1941 and the percentage of total nonagricultural employment represented by each were as follows: Employment Percentage in key de¬ of total non- Industry fense indus-.. agricultural tries 1/ employment April 1941 Aircraft engines 44,800 .12 Aircraft and parts (exclusive of engines) 166,100 .44 Shipbuilding 157,800 .42 Machine tools • 89,600 .24 * Machine tool accessories 50,600 .13 Screw machine products 29,900 .08 Abrasives 1-3,400 .04 Instruments (professional, scientific) 29,900 .08 Optical goods 18,100 .05 Aluminum manufactures 34,300 .09 Srass, bronze, and copper products 118,200 .31- Foundries and machine shop products 506,000 1.35 Electrical machinery (apparatus and supplies) 326,900 .87 Blast furnaces, steel works, and rolling mills 550,000 1,49 Smelting and refining copper, lead, and zinc 34.300 .09 Total 2,179,900 5.79 See footnote on following page. A2829 23 JL./Excludes employment in explosives, ammunition, and firearms industries, as these figures are not being made public. Em¬ ployment in Government shipyards is also excluded. In April Government yards employed 144,030, or .38 percent of total nonagricultural employment. It is apparent that defense industries employ only a small proportion of all workers. Very large gains in these indus¬ tries will not greatly affect the volume of unemployment. Future labor requirements for aircraft, machine tools, and shipbuilding have been estimated by the Bureau of Labor Statis¬ tics. In the aircraft industry, employment in plants of final assembly totaled 217,000 on March 31. (This includes manufac¬ ture of all parts - frames, engines, propellers, etc.) Peak employment of 405,300 is estimated for November 30, 1941. In the machine-tool industry, it is expected that 22,600 additional wage-earners will be employed between January and December 1941, bringing the total number of wage-earners to ap¬ proximately 102,800. In shipbuilding, the present schedule will require a continuous increase in the number of workers until peak employment of approximately 560,000 is reached in Septem¬ ber 1942. Ship construction constitutes the largest single cate¬ gory of defense activity - 36 percent of total contracts awarded through March. Employment in this large segment of the defense program has expanded very slowly thus far. Yards have been work¬ ing at the capacity level for some time. New construction fa¬ cilities require considerable time to build. Small as these prospective employment increases are in terms of total employment, it is questionable whether such schedules A2829 24 can be met because an exceptionally high, proportion of skilled workers is_required in defense industries. During last Novem¬ ber and December, 12,000 defense employers were canvassed by the 3urear. of Smploymcnt Security regarding the types of work¬ ers they expected to hire, ^ortv-four percent were to be in skilled occupations, 33 percent in semiskilled occupations, and only 23 xoercent in unskilled occupations. The proportion of skilled workers employed in shipbuilding and machine tools is 48 percent and 46 percent, respectively. Indirect Employment Drom the above figures on direct employment in defense in¬ dustries, it is apparent that it is in nondcfonse industries that the bulk of reemployment must come during the next 12 months if certain widely-quoted estimates are to be realized. Throughout this report the position has been taken that these estimates arc too optimistic, that they have underestimated the impeding effect of such factors as bottlenecks, priorities, and frictional maladjustments. There are additional factors of a more technical sort that will restrict the amount of indirect employment. Indirect employment will arise through the spending and responding (by the recipients) of the funds originally disbursed by the Government. The volume of this responding will be re¬ duced et each successive round by various "leakages" (notably savin^s). It is at this point that the question of .rices and prof¬ its is relevant. If prices rise, there will be a dispropor- A2829 25 tionate expansion of profits. This always happens. Even with stable prices, however, profits will increase as output rises because overhead costs per. unit decline with increasing volume of output.—/ Higher profits will increase savings. Savings are "leakages" - funds received from the spending stream and not returned. They reduce each successive wave of respending of defense funds and hence they reduce the total volume of en- 4\ ) ployaent created by defense expenditures., Savings will thus be a serious drag on the rate at which indirect employment is created in nondefense industries. Hising prices will also restrict the rate of reemployment by retarding consumption, since -wages as a whole inevitably move upward more slowly than prices. A rising price level, therefore, will slow up expansion of output and employment in consumer-goods fields where the greatest excess capacity ex¬ ists. Other fj.ctors that three-ten to keep down the volume of in¬ direct employment lie in the field of fiscal policy. For in¬ stance, if consumption taxes are resorted to extensively in the near future, a considerable part of the rise in consumers1 incomes would bo diverted to the Treasury and the current rate of expansion in nondefense fields would slow down. Further- l/That profits have already increased substantially is evident from data for 1940. According to the Department of Commerce, corporate profits reached the highest level since 1929. Hot income of manufacturing corporations exceeded 1939 by about 30 percent with the metal and mctal-products group up more than 50 percent. In the steel industry, 1939 profits were doubled despite the fact that the average rate of production was only 78 percent. Eurable-goods industries as a whole registered A2829 26 1,/ continued an incroa.se of 06 percent. Profits are expected to "be con¬ siderably higher in 1941 in spite of rising costs and taxes and the fact that special reserves, are being set aside in expectation of additional taxes. more, the Treasury has announced that efforts will be made to borrov; several billion dollars from consumers during fiscal 1942. Borrowing from this source in any such volume must be taken into account in estimating the leverage effect of defense expenditures in creating indirect employment, linrolovment Per Billion of Added Income The past relationship between increases in national income and increases in nonagricultural employment throws light upon the volume of reemployment that may be expected during the next 12 months. Prom 1934 through 1940, between 190,000 and 304,000 workers were reemployed for each billion-dollar increase in na¬ tional income. Therefore, if past experience is any indication, we can expect employment to increase between 200,000 and 300,000 for each billion-dollar increase in national income that occurs during 1941. This type of calculation is useful in providing a general limit to the volume of reemployment that can be expected. For example, if national income increases to 82 billion for calcn- cLar 1941, this 8 billion increase may mean that reemployment will be as much as 2.4 million (i.e., at the te of 300,000 per billion of added income) or as little as 1.6 million (at the rate of 200,000 per billion). If national income increases as much as 10 billion this year, the employment increase may be expected to range between 2 and 3 million.' A2829 27 These are the limits suggested by the experience of the last 6 or 7 years. But since experience indicates that reem¬ ployment per billion of added income falls off as total na¬ tional income increases, and since the national income is al¬ ready at an all-time high (when adjusted for price changes), it seems reasonable to assume that the rate of reemployment this year per billion of added income will be closer" to 200,- 000 than to 300,000, At any rate, this type of calculation provides no support for widely quoted estimates of reemployment during 1941 rang- t ,.ir. ing from 4 to 6 million. If reemployment per billicm of added income amounts to 200,000, reemployment of 4 million would re¬ quire an increase in national income of 20 billion (20 x 200,- 000), It is generally conceded that an increase of this mag- • v ' . , ' nitudo is likely only if a substantial inflation occurs, in which case the rise in income would not1 represent a correspond¬ ing increase in production and employment so that the ratio of reemployment to increased income would decline and cense- " "f 'y 'T- ' quently the estimated reemployment would not materialize, . i r ■ - u- ' •"*, . ' • In the absence of substantial inflation during 1941, past ■ \ ;o- experience indicates that the rate of reemployment per billion « - . . of added income will fall, and a reasonable estimate of the possible incre-se in national income (8 to 10 billion) indi- catos a maximum reemployment during 1941 of approximately 2,5 million. A2829 28 ■The Volume of Unemployment Whatever increases occur during fiscal 194-2 in the volume of employment will 'not he reflected in corresponding reductions in the volume of unemployment. The major reason for this lies in certain dynamic aspects of the labor supply. In the first place, the normal increase in the labor supply amounts to about 500,000 workers annually. For this reason-alone, an increase of 2 million in total employment during fiscal 1942 would mean a. reduction in unemployment of only 1.4 million. Additional allowance must be made-for abnormal growth of the labor supply - for so-called "induced entrants." It is practically certain that employment increases resulting from the defense program will be accompanied by a considerable net increase in the active labor supply. From 2 to 3 million sur¬ plus farm workers, counted as employed in agriculture, are ready- to seek employment in urban industries when jobs are available. Better employment opportunities and higher money wages should bring into the market a large number of youths who have continued in school because they could not got a job. Similarly, many women not normally seeking jobs vail be attracted into the labor market. None of these types of workers is included, in:-'current unemployment estimates and yet they very clearly constitute immediately available labor. Large numbers of "new" workers from such sources will secure Jobs, thus diminishing the effect of gains in employment upon the A2829 29 supply cf workers now counter1 among tho unemployed. ■ r In short, there is a huge .reserve of potential workers (hot now counted as members of the labor supply) that will seek jobs as employment opportunities, increase. If the same proportion of the population aged 14 and over enter the labor market as in 1929, a potential labor supply of at least 60 million is indicated. This is approximately 7 million more workers than tho labor-supply figure shown by the preliminary census reports for April 1940, and approximately 12 million more workers than v/oro employed in April 1941. It follows that caution should be exercised in translat¬ ing estimates of probable increases in employment into esti¬ mates of probable future decreases in unemployment. The marked employment gains that are in prospect may well be offset in con¬ siderable part by sharp gains in the total supply of labor of¬ fered in the market. Such evidence as is available indicates that there was an abnormal increase in the labor supply during the World War of at least 3 million. Tho Bate of Expansion Will Slow Down There are a number of reasons for expecting that the rate of expansion of output and income under tnc defense program will tend to slow down. Production gains were most rapid dur¬ ing the first few months when idle capacity was being absorbed. Capacity operations have now become a limiting factor in cer- • -y tain crucial areas. Aside fr-wr, whatever progress is made in A2829 30 "farming out" defense orders, the pace of future advance will "be geared to the completion of new facilities, especially in the metals, machine tool, and finished-armament industries. Henceforth, production gains wj.11 tone to come in fits and starts; output will move upward in a series of steps. When new plants are completed and additional workers have been trained, mother stop-up will occur. Total output and employment are depend¬ ent upon the level of output of armaments in the sense that the latter determines the rate at which defense expenditures enter the spending stream. Additions to capacity take tir.o to complete and will slow down the pace of the upswing. Additions to basic capacity i the steel industry, for instance, require over a ""'env* to com¬ plete, end decisions to increase steel capacity have not yet been made in significant amounts. The levels reached by production and employment will also depend upon the ability of industry to become organized at a higher and higher pitch. With production already at the high¬ est rate in history and with bottlenecks evident in several key industries, the problems of organization (of the labor supply, of materials, and of plant expansion) to • chieve higher levels become increasingly difficult. Production is not only at unaccustomed levels - it also involves a large proportion of armament goods in which manu¬ facturing experience is lacking. This means changes in design, mistakes in specifications, mistakes in timing* in the placing of orders, and unforeseen shortages of materials. New channels A2829 31 for the production and flow of materials must "be so organized that completion of finished products can go fobward without delay. Bottlenecks appear everywhere. There 'will he persist¬ ing shortages of certain types ox labor and productive capacity. Impediments of this sort may be expected t6 grow in impor- tance as industrial production advances to "higher and higher levels so that the rato of advance from any given level may be expected to be slower than from the previous 'lovcl. -An ad- - • . .0 vanco in the Bcdoral Reserve Index of Industrial Production from 140 to 150 will be more difficult to achieve than the ac- vanco- from 120 to 140. Evidence along those linos began to appear several months"' ago. In an analysis of labor market developments in January, the Bureau of Employment Security found that the gradual up¬ swing of most phases of industrial activity had continued but at o- lower rate of'increase in employment. In some sections, factory employment had. generally leveled off, and increases in d_ofense industries were equaling lay-offs in nOndefense lines. ~ Additional firms had reached capacity operations and could not add workers until new facilities were obtained, while the num¬ ber of firms whose production had been curtailed by shortages of materials, equipment, or skilled workors had increased. Conclusion The defense program might bo expected to release the nation's e full potential capacity to produce. According to policy pro- A2829 32 nouncomcnts, wc arc determined to get production at any cost. Presumably, the measures taken to further the defense program will look toward maximum production rather than tho protection of vested interests. The quantity of output has become tho domi¬ nant consideration rather than the cost to individuals. Tho rate at which output rises does not dopond upon the volume of appropriations but upon the organization and direction of American industry. Certain outstanding obstacles to rapid cxpansion have been discussed in this report. Insistence upon maximum production has been slow in being translated into ac¬ tion. The required moasurcs for proper coordination and con¬ trol have boon slow in formulation and slow in becoming accepted, as essential to an adequate defense program. The achievement of full cnploynont and maximum utilization of resources is not an immediate prospect. After reasonable allowance for .all stimulative and restrictive factors in light of present knowledge, it appears that unemployment cannot bo expected to decline more thru 1.5 million during fiscal 1942. In this case, total unemployment -as indicated by the various published estimates will average from 5.5 to 7.5 million for the coming fiscal year. FEDERAL WORKS AC-ENCY WORK PROJECTS ADIII EI STRAP I ON Division of Research June 25, 1941