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
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
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
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."
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.