Comparative research contrasts the corporatist welfare states of Europe with the unregulated U.S. labor market to explain low rates of U.S. unemployment in the 1980s and 1990s. In contrast, this article argues that the U.S. state made a large and coercive intervention into the labor market through the expansion of the penal system. The impact of incarceration on unemployment has two conflicting dynamics. In the short run, U.S. incarceration lowers conventional unemployment measures by removing able‐bodied, working‐age men from labor force counts. In the long run, social survey data show that incarceration raises unemployment by reducing the job prospects of ex‐convicts. Strong U.S. employment performance in the 1980s and 1990s has thus depended in part on a high and increasing incarceration rate.