Economic Report of the President

was in large part the price the United States paid for failing to controlinflation in the late 1970s.LEGACIES OF THE 1970sIn the 1960s, many economists believed that the Federal Governmentcould keep unemployment down permanently by accepting ahigher rate of inflation. Steady rises in productivity and living standardswere taken for granted. During the 1970s these views proved tobe incorrect. By the closing years of the 1970s, both the unemploymentrate and the inflation rate were higher than they had been inthe 1960s, and the rate of productivity growth was lower.Why did unemployment, productivity growth, and inflation allworsen in the 1970s? These developments occurred in part becauseof factors outside the government's control, such as changes in thesize and composition of the work force and rising world energyprices. But the economy also suffered from long-standing governmentpolicies that exacerbated inflation and distorted the incentivesto work, save, and invest.RISING UNEMPLOYMENTTotal employment grew rapidly in the 1970s but so did the rate ofunemployment. The civilian labor force participation rate rose from60.4 percent of the population in 1970 to 63.8 percent in 1980. Theunemployment rate averaged 5.4 percent in the first half of the1970s, greater than the 4.8 percent average of the 1960s. The recessionof 1975 took the unemployment rate to a monthly high of 9.0percent. Unemployment then declined to a monthly low of 5.6 percentin 1979, only to begin rising again to a peak of 7.8 percent inJuly 1980.In addition to cyclical fluctuations in the economy, a number ofstructural factors contributed to the rise in the unemployment rateover the decade. These included the changing demographic structureof the labor force, the increased number of workers dislocated bychanges in technology and international competitiveness, and thework registration requirements in a number of government welfareprograms.A more detailed analysis of unemployment and the labor marketconsequences of macroeconomic policy is presented in Chapter 2.DECLINING PRODUCTIVITY GROWTHFrom 1960 to 1970, real output per hour in the private sector roseat an annual rate of 3.0 percent; from 1970 to 1980 it rose at a rateof only 1.4 percent. Labor productivity growth would probably have18