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When It Pays Not to Work

Diana Furchtgott-Roth | 09/09/2013 |

Despite a decline in the jobless rate to 7.3 percent in August from 7.4 percent in July, the labor force data released Friday were disturbing. The reduction in the unemployment rate was caused by a decline of 312,000 in the number of people in the labor force, a substantial deterioration for one month and an extension of a troubling trend.

Congress should reconsider eligibility criteria and benefit levels for programs such as unemployment insurance, food stamps, and disability insurance.  These programs have ballooned over the past five years, discouraging work.

The proportion of working-age Americans who have jobs or who are looking for them—the labor force participation rate—has been falling, even though employment has been expanding. It now stands at 63.2 percent, down two-tenths of a percentage point from July.  That is the same level as in 1978, prior to the decade where millions of women marched into the labor force.

During most recoveries, labor force participation rate eventually rises.  Although the recovery began over four years ago, in June 2009, the labor force participation rate continues to decline. Fewer workers translate into lower economic growth.

It is understandable that people drop out of the labor force—stop looking for work—when unemployment is rising and they have become discouraged. But, since the employment rebound from the 2007-2009 recession began in May 2010, the labor-force participation rate has fallen for both men and women.
After declining from a peak of 67.3 in 2000, the rate hovered around 66 percent until 2008. Since then, it has gradually fallen to 63.2 percent.
Some attribute this to early retirement.  Americans aged 55 and over have shown the largest increase in employment (10.5 million) and in labor force participation rate (4.8 percentage points) over the past decade. No matter that nationally, their unemployment rate, at 5.1 percent, was the lowest in August, and that those older workers have experienced the smallest increase during the recession and in the months thereafter.

Lawrence Lindsey, president and chief executive officer of The Lindsey Group, estimates that if the labor force participation rate were the same today as it was before the recession began, the unemployment rate would be 11.2 percent, rather than 7.3 percent.

One reason for this continuing trend is the panoply of government benefits, including unemployment insurance, now available up to 73 weeks, depending on the state. On average, unemployed Americans can receive 53 weeks of unemployment insurance, up from 26 weeks before the recession.

Over 8.9 million adults received disability insurance from the Social Security Administration in July 2013, the latest data available.  The number of people receiving benefits is 23 percent higher compared to  five years earlier and 55 percent higher than 2003. Benefits are higher, too.  Recipients get an average of $1,129 monthly, 12 percent more than in 2008 and 35 percent more than in 2003.

Over 47 million Americans receive benefits from the Supplemental Nutrition Assistance Program (formerly food stamps), Other elements of the federal safety net include mortgage relief, and Temporary Assistance to Needy Families.  The provision of subsidized health care for those earning below 400 percent of the poverty line under the Affordable Care Act, beginning in 2014, will exacerbate this.

These programs have expanded in two ways. Eligibility has increased, and the programs have become more generous.

Take unemployment insurance. It is particularly relevant both because it represents a large share of all benefits paid to individuals and because the dramatic extension of unemployment insurance benefits, from 26 weeks to 53 weeks. During the recession, benefits were extended to 99 weeks.

University of Chicago professor Casey Mulligan, author of The Redistribution Recession, calculates that between 2007 and 2010, when the country was in deep recession and gradual recovery, spending on unemployment insurance rose by 293 percent adjusted for inflation. If unemployment eligibility and benefit rules had remained at 2007 levels, spending would have risen by 50 percent.

Mulligan estimates that extending the duration of unemployment benefits alone accounted for about one-sixth of the shrinkage of hours worked during that period.  He estimates that all benefits taken together explain about half of the decline in the labor force participation rate.  The other half is explained by the recession and difficulty of finding a job.

In contrast, Alan Blinder wrote in The Wall Street Journal on June 10, 2013 that government spending should be used to stimulate the labor market. He said “If government purchases had increased enough to leave overall GDP growth at 3% instead of 2%, history suggests that an additional three million to four million jobs would have been created.”

Under the sequester, benefit programs such as food stamps, Social Security disability payments, Supplemental Security Income, Medicaid, the Children’s Health Insurance Program (CHIP), Temporary Assistance for Needy Families, and refundable tax credits like the Earned Income Tax Credit and the Child Tax Credit  were exempt or trimmed only slightly.  This year, they could be modified if President Obama and the Republicans reach a fiscal deal.

The shrinkage of the labor force has profound implications for future economic performance.  Reduced economic growth will lead to steadily higher tax burdens on existing workers, which will in turn discourage labor force participation. This race to the bottom needs to be stopped.


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