Notes: WWII Wage Policy, Great Convergence/Divergence, and Policy Impacts
WWII Wartime Economy and Wage Controls
Population context: people in the country; about in uniform during the war.
Willow Run and production roles:
Willow Run (near Ann Arbor, Michigan) produced the B-24 and B-29 bombers, contributing significantly to winning the war in the later years.
The wartime plan relied largely on private businesses under contracts with the War Department or the Navy; private sector dominated production with government direction.
Economic pressures and policy response:
The economy was overheated with strong inflationary pressures.
A system of wage and price controls was instituted to curb inflation while keeping private sector efficiency.
Distinction from a Soviet-style approach: controls were not a planned centralized communist system; private firms still operated under wartime contracts.
Labor market dynamics during wartime:
Firms competed for workers and engaged in labor poaching to retain/attract talent; high-competition environment pushed wages up.
A notable productivity anecdote: early in the war, an eight-month timeline to build a Liberty freighter; within eighteen months, production accelerated to deliver a Liberty freighter in about three weeks due to worker innovations (e.g., welders proposing process improvements so that a brother in danger could return home).
Workers engaged in long shifts to meet wartime goals.
Wage policy specifics (National War Labor Board):
You could raise wages to per hour freely (roughly dollars per hour today).
For wage increases between and per hour, you needed local NWLB permission; typically refused.
For wage increases above per hour, you had to petition the national NWLB, which almost always denied.
Result: a large compression of wages, where higher-wage increases were resisted while lower-wage adjustments were more common.
Economic and social imprint of wartime wage controls:
The compression contributed to a broader “great compression” of wage differences, aligning with a generation-long trend toward more equal earnings and income distributions.
The speaker notes a cultural/ethical shift: a national ethos of more equal earnings became embedded for a generation, which felt natural at the time.
Personal anecdote: growing up in a small Texas Gulf Coast town with uniform housing (most people in three-bedroom homes, homelessness and mansions were rare), illustrating the era’s overall equality in everyday living standards.
Transition to the postwar era and its interpretation:
The subsequent decades saw a reversal toward greater inequality and a broader divergence in earnings.
The speaker argues the Great Convergence (wartime/public-policy driven equality) and the Great Divergence (late 20th century) were largely political phenomena, not purely economic ones.
If earnings differences were eliminated (everybody earns the same), the gender earnings ratio and the black–white earnings ratio would converge toward 100%.
The Great Convergence, Great Divergence, and the Black White Earnings Gap
Definition and scope:
The Great Convergence refers to the mid-20th century compression of earnings differences due to wartime policies and New Deal-era reforms.
The Great Divergence refers to the subsequent decades of increasing inequality and earnings dispersion, driven by policy shifts starting in the 1970s–1980s.
Early data on Black Americans’ progress:
The 1940 census was the first to routinely collect many earnings-related questions; thus, the first reliable black–white earnings ratio data begins in 1939.
1939 black–white earnings ratio (for both men and women) was in the low percent (approximately ).
By , Black women had almost achieved parity with White women in earnings; Black men had made substantial progress but had not achieved parity.
Michigan as a case study of convergence and mobility:
Michigan became notable because of the United Auto Workers (UAW) and a booming auto industry, which did not discriminate in labor unions and provided broad economic gains.
Historically, African Americans in Michigan grew from a small population to roughly today, largely due to migration from the South in search of manufacturing jobs.
By the mid- to late-20th century, Black women in Michigan earned substantially more than White women on average; Black men in Michigan fared better than Black men anywhere else in the country.
Migration patterns: many Black Americans moved from Southern farms to Southern cities or to Northern cities (e.g., Philadelphia, New York, Detroit, Chicago).
Education and the New Deal context:
The New Deal expanded schooling opportunities and enacted wage standards (e.g., minimum wage) that helped narrow gaps.
The New Deal had a complex, sometimes paradoxical inclusion: the Fair Labor Standards Act and the National Labor Relations Act advanced worker protections, but exemptions existed for agricultural workers (largely Black men) and domestic workers (largely Black women).
These carve-outs limited the reach of New Deal protections, though many Black workers still benefited indirectly.
Civil Rights era and policy expansion:
The Civil Rights Act and the 1966 expansion of the minimum wage to cover nearly all workers broadened coverage and elevated earnings for previously excluded groups.
The great convergence was largely intentional and a predictable outcome of public policy; conversely, the great divergence followed policy shifts that reduced progress.
Tax policy and its role in divergence:
Tax progressivity declined over the decades: the top marginal rate fell from high levels (e.g., around 91 ext{%} at birth into late 20th century) to lower levels (e.g., 39.6 ext{–}37 ext{%} in recent decades; sometimes around the 35 ext{–}37 ext{%} range depending on the administration).
Corporate tax top rate declined from over 50 ext{%} to 21 ext{%} (TCJA), and some provisions lowered the effective rate further; the top estate tax rate fell from about 77 ext{%} to around 40 ext{%}, with exemptions (e.g., taxes on estates below a high exemption level) moderating effective progressivity; the estate tax exemption rose and is now effectively much higher (roughly in the tens of millions per couple, with the exemption recently adjusted to be even higher than in the discussed period).
The net effect: reduced progressivity in the tax system contributed to greater after-tax income concentration.
Unions, regulation, and the 1990s financial shift:
Labor unions have lost clout; the Supreme Court has been perceived as anti-union in recent decades, weakening the National Labor Relations Act’s effectiveness.
Union density rose after NLRA but fell to below in the years for which data exists (the latest point cited in the talk).
Financial regulation was rolled back in the 1990s, contributing to a transfer of trillions of dollars to the financial sector and culminating in the 2008 financial crisis, triggered by the Lehman Brothers collapse on .
The minimum wage trajectory and labor market effects:
The minimum wage rose relative to inflation through much of the mid-20th century; by 1966, coverage expanded to nearly all workers rather than excluding domestic workers.
Since 1968, the minimum wage has generally not kept pace with inflation, and as of the talk’s date, the federal minimum wage had not been changed since ; many states set higher minimum wages.
Economic research cited (e.g., David Autor and colleagues’ work) suggests the absolute number of people near the minimum wage remains small in the United States, so the unemployment effects of modest increases have been limited historically; extreme higher rates (e.g., ) could raise unemployment more substantially.
International trade and competition:
Trade policy is framed as not the primary driver of divergence in the US due to a large domestic market and geographic advantages, but imports surged in the late 20th century and contributed to labor market adjustments.
Social norms and family structure:
A key point: two-parent households tend to have better economic outcomes for children, implying social norms and family structure influence distributional outcomes.
The divergence period affected different groups differently; in some regions (e.g., the South), Black men did not fare as well; Black women in some regions did relatively better due to rising educational attainment and labor-force participation.
Education, gender, and occupational dynamics:
The Cornell economists’ article “Swimming Upstream” describes how women’s rising educational attainment and strong attachment to the labor force allowed them to make big gains even as a general current of divergence pushed other parts apart.
In the 1970s–1980s, women dramatically increased educational attainment and labor force attachment, which substantially reduced the gender earnings gap by about half.
The 2024 data update indicated the median woman’s earnings were flat while the median man’s earnings rose (~4 ext{%}), causing the ratio to dip; the factors include stronger female labor-force participation and education, with lingering gaps attributed to occupation and other complex social phenomena.
The breakdown:
Education and experience differences largely explained the gap historically.
Occupation differences have shrunk but remain significant (e.g., many female-dominated fields vs male-dominated fields).
A residual unexplained gap may reflect discrimination and other subtle social dynamics that are hard to measure; employers may deny discrimination, but it can persist in practice.
Meta perspective on policy trajectories:
Much of the last forty-five years of divergence is tied to policy choices that slowed or reversed earlier progress.
The discussion emphasizes that policy choices, not just market forces, shaped the Great Divergence.
Politics, Elections, and Institutions
The political dynamics that shaped (and reshaped) convergence/divergence:
The Democratic Party of the 1930s–1940s was a complicated coalition, blending progressive labor advocacy with Southern racial conservatism; public policies like Social Security, Fair Labor Standards Act, and National Labor Relations Act passed in this context.
The New Deal matrix had deliberate compromises: exemptions for agricultural workers and domestic workers, limiting scope but expanding protections for many Black workers.
The role of the 1960s and later reforms:
Civil Rights Act and the expansion of the minimum wage in 1966 broadened protections to more workers.
These reforms contributed to narrowing some racial wage gaps and expanding labor-market participation for women.
Tax policy and inequality:
The top marginal tax rate fell from historic highs to multi-decade lower levels; the corporate tax rate declined, reducing the progressivity of corporate taxation; the estate tax exemption rose, reducing tax burdens on large estates.
Labor organization and regulation:
Unions historically rose in share after NLRA but have declined in recent decades; Supreme Court rulings have influenced employer-employee relations and union power.
The Electoral College and representation:
The United States presidential system has produced outcomes where the winner of the popular vote did not win the presidency in two notable instances: 2000 (Bush v. Gore) and 2016 (Trump v. Clinton).
The presidents who won without the popular vote then nominated Supreme Court justices (e.g., Samuel Alito, John Roberts, and later others), shaping the Court’s direction.
This mismatch between popular will and outcome is described as “democracy light” by the speaker and is framed as a structural flaw of the current system.
The future outlook and political considerations:
Real reform would require concerted effort, particularly given long-run trends that are not likely to reverse quickly.
The speaker declines partisan framing but discusses the implications of different policy trajectories and political choices for convergence/divergence.
Contemporary political exemplars and regional voices:
Reference to contemporary Democratic lawmakers with national security backgrounds (Alyssa Slotkin, Abigail Spanberger, Mikey Sherrill) and potential electoral dynamics in 2028.
A caution about electoral strategy, immigration politics, and public support dynamics in how parties position themselves and address worker interests.
Concluding reflections on democracy and institutions:
The talk ends with a call to students to engage over the long term and to recognize that economic outcomes are tied to institutional design (tax policy, regulation, labor law, education, and political structures like the Electoral College).
Key Concepts, Figures, and Equations to Remember
Great Convergence (policy-driven narrowing of wage/income gaps during the New Deal and WWII era):
Public policies included wage controls that kept inflation in check while allowing private production to grow.
Education expansion and social safety nets contributed to broad-based earnings growth and reduced inequality.
Great Divergence (post-1970s widening of wage and income gaps):
Triggered by policy shifts: lower tax progressivity, reduced regulatory oversight, diminished union power, and changes in the financial sector.
Black–White earnings ratio dynamics:
1939: roughly for both Black men and women relative to White counterparts.
1979: Black women close to parity with White women in earnings; Black men improved but not to parity.
Key policy milestones and numbers:
Top marginal income tax rate historically around 91 ext{%} at birth; currently around 37 ext{–}39.6 ext{%} depending on administration.
Corporate tax top rate moved from >50 ext{%} to around 21 ext{%}, with the TCJA effect and related changes.
Estate tax top rate moved from 77 ext{%} to around 40 ext{%}, with exemptions rising (e.g., the exemption around per couple, later adjusted higher).
The 1966 expansion of the minimum wage to cover almost all workers; federal minimum wage had not been changed since in the period discussed.
Notable dates and events:
1930s–1940s: New Deal reforms and WWII wage policies; 1940 census data improvements.
: Lehman Brothers collapse and triggering of the financial crisis.
Important metaphors and ideas:
"Swimming Upstream" – women’s ability to close gaps by pushing against the prevailing economic flow through education and labor-force participation.
Regions and mobility:
Northern migration of Black Americans (e.g., to Detroit, Chicago) for industrial jobs; Michigan as a focal point of wage convergence for Black workers due to UAW presence and manufacturing opportunities.
Structural features of democracy and policy:
The Electoral College and the disconnect between popular vote and presidency; implications for policy direction and reform debates.
Quick Q&A Prompts for Exam Preparation
Why did the National War Labor Board approve some wage increases but block others during WWII? What was the systemic goal and its economic effect?
How did the Great Convergence become a political outcome rather than a purely economic one? Name at least three policy channels.
What role did the New Deal’s occupational exemptions play in Black workers’ outcomes, and how were those gaps later addressed?
How did union presence and regulation change from the 1930s to the 1990s, and what were the economic consequences?
Explain the paradox of the Great Divergence in the context of persuasion vs policy: what policy shifts contributed to the widening gap in the last four decades?
Identify and explain two major structural features of the U.S. electoral system that influence economic policy outcomes (e.g., Electoral College, Supreme Court nominations).
Discuss the evidence around minimum wage increases and unemployment in the U.S.; what does the literature (e.g., MIT researchers) generally indicate about effects on employment?
What is the significance of the statement that great convergence/divergence has been largely political rather than purely economic? Provide examples.
How do education, occupation, and discrimination interact to explain residual gaps in earnings between men and women today?
What are potential policy levers to promote convergence in a future scenario, given the dynamics discussed in the talk?