Why Is the Labor Force Participation Rate So Low?

April 10, 2014

The unemployment rate may have fallen to 6.7 percent, but only 63.2 percent of Americans age 16 or older are participating in the labor force, says Glenn Hubbard, dean of Columbia Business School.

The labor force participation rate (measured by those working or seeking work) is up from recent months, but it is still low compared to 2000. It used to be the case that job creation and labor force participation "went hand in hand" -- this was the situation even in the late 1990s. But that is no longer true. Today, the labor force participation rate is basically where it stood in 1977.

Why is the rate so low? Is it merely cyclical, or are there deeper problems within the economy that are inhibiting any progress on the participation rate?

  • The rate increased from the middle of the 1960s through the 1990s, as women entered the workforce and baby boomers reached their prime working years. But over the last 10 years, the participation rate has fallen. Some see this as nothing more than cyclical, projecting that workers will continue moving back into the labor force as the economy grows.
  • But there are deeper structural problems, too. A 2012 Federal Reserve Bank of Chicago study found that 25 percent of the decline in participation was due to retirements since the start of the Great Recession.
  • But that is not the only story, because it is not just for baby boomers that the participation rate has declined. Younger workers are dropping out of the labor force as well, due to discouragement, work disincentives created by public policy, a lack of training and an increase in seeking disability insurance.
  • On top of this, globalization and changes in technology have lowered employment and wage growth for low-skilled workers.

The United States should reconsider what the proper role for the federal government is in the labor market, and implement policies that will actually remove barriers to lasting labor force participation by low-wage workers.

  • The Earned Income Tax Credit should be expanded.
  • Disability insurance needs reform.
  • There are further work disincentives in the Affordable Care Act, which phases out insurance subsidies as incomes rise, raising effective marginal tax rates on earnings.
  • Unemployment insurance continues to be expanded, but instead should be combined with block grants to the states, which can create their own training and workforce programs.
  • Social Security needs reform.
  • The retirement earnings test within Social Security should be eliminated.

Source: Glenn Hubbard, "The Unemployment Puzzle: Where Have All the Workers Gone?" Wall Street Journal, April 4, 2014.

 

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