U.S. BUSINESS is once again creating jobs in bunches. Payrolls increased 217,000 in May, according to Friday’s monthly update from the Labor Department; it was the fourth straight month of above-200,000 employment growth. All 8.7 million jobs lost during the Great Recession have now been “recovered,” in a statistical sense, and that’s an important milestone.
Alas, since the U.S. labor force kept growing over the last half-decade, millions more jobs are needed to restore the unemployment rate to pre-recession levels, rather than the 6.3 percent it attained in May. The unemployment rate would have been even higher but for the fact that a significantly smaller percentage of the working-age population is still participating in the labor force, by actually working or by seeking a job. In 2007, the labor-force participation rate averaged 66 percent; last month, it was 62.8 percent, the lowest level since 1979, and trending downward.
Declining labor-force participation may be a new characteristic of the post-recession U.S. economy, and it bodes ill for two reasons: The economy’s capacity for growth depends on robust use of all available factors of production, the minds and hands of U.S. workers very much included; indeed, the surge of women into the workforce was one of the key drivers of economic expansion in the 1980s and 1990s. Declining labor-force participation implies a rising “dependency ratio” of workers to recipients of social assistance.
As economic life continues to normalize, government will increasingly have to focus its efforts on countering the decline in labor force participation. To some extent, labor force expansion was bound to decelerate, as baby boomers aged and as women’s participation became normal rather than novel. Additionally, young workers increasingly opt for college over work after high school. Such demographic factors, about which government can do relatively little, account for some portion of the decline, though how much is a matter of much economic debate.
Nevertheless, some of the decline in labor-force participation is a result of the unemployment shock that the Great Recession delivered, a shock so big it caused marginal workers to give up on seeking work. “Discouraged” workers, plus those who sought Social Security Disability Insurance (SSDI) as an alternative source of income, account for a large chunk of the labor-force drop-off. Continued strong hiring is the main cure for worker disaffection, and getting workers back into the work force is an appropriate task for government policy.
Among the many policy weaknesses highlighted by the Great Recession is the perverse effect that government programs can have on work incentives. SSDI rewards workers for quitting their jobs in order to apply and for staying on the rolls permanently once they qualify. Another example is the earned-income tax credit, which insufficiently bolsters earnings of single, childless people. Together with a more open and efficient immigration policy, pro-work reforms to federal programs could help ensure that the U.S. economy benefits from the efforts of everyone who is willing and able to help.