Increase in Disability Benefits Linked to Decrease in Labor Force Participation

July 24, 2014

James Sherk, senior policy analyst at the Heritage Foundation, explains what the labor force participation rate means for the economy.

The labor force participation (LFP) rate is a measure of the proportion of adults who are employed or actively seeking employment. A high LFP rate indicates that more work opportunities are available in the economy or that more people are willing to work, and the rate can change based on a number of factors:

  • Age: Workers ages 25 to 54 are more likely to participate in the workforce, while older workers are more likely to leave the workforce and retire.
  • Economic conditions: While adults may cease work for reasons separate from the health of the economy, the LFP rate generally decreases when the economy is performing poorly, because workers, feeling defeated, give up looking for jobs.
  • Disability benefits: Social Security Disability Insurance (SSDI) enrollment has been on a steady increase since the mid-1980s, when eligibility for the program was expanded, and SSDI applications spike during recessions. Today, six percent of the adult population collects SSDI.
  • Government assistance: Poorly designed welfare programs can discourage recipients from seeking employment, as can subsidies.
  • School enrollment: The percent of Americans enrolled in school has shot up since 2007. In a weak job market, many students have turned towards advanced degrees in the hope that they will have better job opportunities upon graduation.

The LFP rate in the United States began falling in 2000, dropping sharply after the Great Recession. But while most of the drop in LFP prior to the recession was due to demographic changes, such changes were responsible for only one quarter of the drop in LFP after the recession. Most of the post-recession drop, writes Sherk, is explained by increased enrollment in Social Security Disability Insurance and school. While students pursuing degrees generally return to the labor market, those receiving disability benefits rarely return to work -- a point that Pam Villarreal, NCPA Senior Fellow, made recently in a study on the growing number of women receiving disability benefits.

Source: James Sherk, "Not Looking for Work: Labor Force Participation and Opportunity," 2014 Index of Culture and Opportunity, Heritage Foundation, 2014.

 

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