The Cold War and the U.S. Labor Market

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We argue that the Cold War contributed to the equitable and tight labor markets of the post-war decades. On the labor-demand side, we isolate plausibly exogenous shifts in military procurement across states and firms. We show that military procurement—especially non-R&D procurement—increases manufacturing employment and wages and reduces inequality. Overall, we estimate that the 1950s-to-1990s decline in defense production (from 5.6 to 1.8 percent of annual GDP) explains over one-quarter of the decline in manufacturing employment and just under one-tenth of the rise of top-ten income share. Using firm-level variation, we find that CEOs of companies dependent on procurement contracts for revenue are paid less than CEOs of similar companies, consistent with informal Congressional oversight of executive pay at major contractors. Using new data on the R&D vs non-R&D composition of military spending in this period, we document that all the labor market and inequality effects are driven by non-R&D spending, which is the bulk of procurement. On the labor-supply side, the Cold-War-era draft removed millions of young men from the civilian labor force, even in peacetime, significantly reducing young male civilian unemployment. We estimate that the end of the draft in 1973 can explain nearly 80 percent of the large, relative rise in male age 18-24 unemployment over the next ten years. The economic benefits of Cold-War procurement further created endogenous political constituencies, increasing support for military escalation and hawkish foreign policy among working class, Democratic, voters.