Low Labor Force Participation: What Congress Can Do to Help

September 24, 2013

The economy has barely recovered from the Great Recession. More than four years after the recession started, unemployment remains high. But the unemployment rate does not fully measure the weakness in the economy, says James Sherk, a senior policy analyst for the Heritage Foundation.

When President Barack Obama took office in early 2009, his administration projected that if Congress passed his stimulus package, unemployment would fall from 7.8 percent at that time to 5 percent by mid-2013. Today, the unemployment rate stands at 7.4 percent.

Job creation and new hiring remain low for several reasons:

  • The most prominent are the lingering effects of the collapse of the housing bubble and resulting financial crisis, as well as the domestic consequences of the economic slowdowns in Europe and China.
  • Excessive taxes and increased regulation discourage risk taking and investment.
  • The fiscal cliff tax hike in January raised the average top marginal tax rate -- including federal and state income taxes and payroll taxes -- to 48 percent.
  • Entrepreneurs and business owners who take risks to expand their enterprise get to keep barely half of the additional money they earn, while bearing all the downsides if the venture fails.
  • The administration has also increased the regulatory burden facing businesses, especially in health care.

Small-business owners report that tax burden and government red tape are significant problems. In fact, small-business owners are more likely to cite either taxes (21 percent) or regulations and red tape (21 percent) than poor sales (16 percent) as their single greatest problem.

Congress cannot control Europe's economy or retroactively undo the housing bubble. However, Congress does have direct control over the taxes and regulations it imposes on employers. Congress should reform the tax code so job creators do not face tax burdens of almost 50 percent, and should streamline or eliminate unnecessary regulations. The government should reduce the burden on those who are creating jobs during the weakest labor market in two generations.

Source: James Sherk, "Not Looking for Work: Why Labor Force Participation Has Fallen During the Recession," Heritage Foundation, September 5, 2013.

 

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