Monday, December 10, 2012

Why No Increase in the Labor Force? ... Government Incentives Not to Work

The economy is recovering, albeit slowly. The good news is the jobless rate has dropped to 7.7%.The bad news is that the labor force participation rate has fallen to 63.6% or more than two full percentage points lower than the 65.7% in effect when the recession ended in 2009.

What gives? Why isn't the labor force growing as the economy begins to get back on its feet?

Discouraged workers are part of the answer, of course. And retiring baby boomers explain another important piece of the puzzle. But what about government disincentives to work? How much "credit" do they deserve?

The Case of the Missing Workers addresses the mystery of the shrinking labor force in this manner:

"The job market recovery continues, sort of, though what it gives with one hand it takes away with the other. In Friday's Labor Department report for November, the U.S. unemployment rate fell to 7.7% from 7.9% in October, but mainly because another 350,000 workers disappeared during the month.

Call it the case of the missing workers. . . . even as payrolls are rising, albeit slowly, the overall labor participation rate has continued to fall. In November, the share of the available labor force that is working fell to 63.6%, which is down from 65.7% when the recession ended in June 2009.

Mull that one over: Three years into an economic expansion, the labor participation rate has fallen two full percentage points and three times this year (including November) it has reached the lowest level since 1981. This means that about three million more workers were working or looking for work in 2009 than in November. In the last year alone, the number of working age nonworkers grew to 89.2 million from 86.8 million.

So why are more Americans sitting on the labor market sidelines even as job opportunities expand?...

The early retirement of aging baby boomers may ... play a role. Some of this may be optional, but some early retirees may have been laid off and simply can't find comparable work at their age. So they stop looking, "retire," and live off savings.

But there may be even unhappier reasons. Economist Casey Mulligan of the University of Chicago has documented that the huge increase in government benefits for not working—food stamps, disability payments and unemployment insurance—are increasing the incentive not to work. Welfare payments that redistribute income from workers to mostly nonworkers now exceed $1 trillion a year.

The trend warrants more study, not least because the decline in the share of Americans working may help to explain the sluggish recovery rate of 2% GDP growth. Fewer workers also mean less tax revenue, more welfare benefits paid out, and thus larger budget deficits. Labor union chiefs like to say we have to "make work pay" in America, but the very transfer payments they support may be encouraging people not to work."

Summing Up

Three million fewer people in the work force now than 2009? That's a puzzler.

In my view, the fall in the work force is certainly not a matter of people being lazy.

Nor is it entirely attributable to the weak economy.

It's likely to be due in large measure to working age people responding in a common sense manner to money made available by government which in effect provides individuals with incentives not to work.

It's pretty much the opposite of the case when unemployment increases as the minimum wage is raised. In that case, as labor becomes more expensive, fewer workers are hired. In fact, the same thing is about to happen with ObamaCare as employers will resist unnecessary costs in the healthcare expenses for employees. They'll do this by hiring more part time workers instead.

In other words, human beings are rational. We consider the various alternatives and then choose the best one available among them.

So if we get the same or almost the same amount of money for not working as we would get by working, lots of us will elect not to work. Nothing complicated about it.

Of course, in the aggregate this harms our economy, employment levels, tax base and general sense of well being.

We can thank the government knows best gang for much of that.

Incentives matter. Sometimes they encourage work, but often they discourage work.

It just depends on what the incentives are.

Thanks. Bob.

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