The March jobs report, released April 4, shows strong labor market growth, with an increase in the labor force participation rate, 192,000 more jobs created according to the payroll survey, and 476,000 more Americans employed according to the household survey. What factors are behind the encouraging news, and how can this trend continue?
The labor force participate rate increased from 63.0 percent to 63.2 percent. While this is still at August 1978 levels, it is an improvement from December’s low of 62.8 percent.
The percentage of the unemployed who have been out of work for over 6 months decreased to 35.8 percent from 37.0 percent—the lowest level since August 2009.
Even with these improvements, the unemployment rate remained unchanged at 6.7 percent. The reason the rate did not fall compared to February is that previously-discouraged workers decided to return to the labor force, which increased by 503,000.
This is very positive news. When people sense the economy is improving, some of those who dropped out of the labor force and stopped looking for work begin to actively seek employment. They are now counted as unemployed, but this is better than when people give up on finding work.
During most recoveries, the labor force increases much sooner. Why did the labor force not start showing signs of recovery earlier? One often-overlooked factor is the expansion of the duration of unemployment benefits to 99 weeks, then 73 weeks. Unemployment insurance only recently reverted back to 26 weeks in most states—the standard, pre-recession length. In December, most states had federally-funded unemployment benefits lasting between 43 and 63 weeks. As benefits began to phase out for the long-term unemployed, some financial disincentives to finding work disappeared.
University of Chicago professor Casey B. Mulligan shows in his book, The Redistribution Recession, that government benefits, including extended unemployment insurance, explain half the recent decline in the labor force participation rate. This decline has been primarily driven by people in their prime working years—not by workers retiring or students staying in school. The labor force participation rate for those aged 25 to 54 has dropped 2 full percentage points since 2007, from 83 percent to 81 percent.
Increasing welfare or unemployment benefits effectively raises taxes on working since as beneficiaries earn more income, they lose their eligibility. The loss of benefits are a perverse form of taxation which discourage out-of-work Americans from seeking employment and improving their economic condition. Similarly, decreases in benefits encourage people to work by reducing marginal tax penalties to working.
Mulligan explains that when unemployment insurance pays more, "the reward to working declines, because some of the money earned on the job is now available even when not working. Decades of empirical economic research show that the reward to working, as determined by the safety net and other factors, affects how many people work and how many hours they work."
Despite the indications that ending extended unemployment benefits has and is helping the labor force, the Senate is expected to vote to pass a renewal on extensions—though the bill faces opposition in the House. The economy will grow faster if people are not discouraged from participation in the labor force. When perverse incentives lead people in their prime working years to drop out of the labor market entirely, Congress needs to make changes. Reinstating extended unemployment benefits may negate the gains in March and send the labor force back down its path of decreased labor force participation.
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