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What Lower Labor Force Participation Rates Tell Us About Work Opportunities and Incentives

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What Lower Labor Force Participation Rates Tell Us About Work Opportunities and Incentives

July 16, 2015

This article is a condensed version of a testimony that can be found here.

In my past research, I have examined trends in the labor force participation of men between the ages of 25 and 54. A strong majority of men in this age range who are out of the labor force—roughly 70 percent on the eve of the Great Recession—tell government surveyors when asked outright that they do not want a job. The increase in their numbers between 1979 and 2006 explains nearly the entire decline in their labor force participation. 

Furthermore, roughly half of men in this age range and out of the labor force cite a disability when asked the reason for not working or looking for work. The increase in their ranks explains about one-third of the decline in labor force participation. Most data on health indicators offer little reason to think that disabilities are becoming more common, but receipt of federal disability benefits has increased significantly since the 1980s. Federal disability benefits increasingly serve as a shadow long-term unemployment program for able-bodied men who struggle to find work.

Today, I will focus my remarks on the labor force participation of black and white men and women under age 25. 

Figure 1 displays trends for these groups over the past 52 years. A number of apparently worrisome features are evident. The labor force participation of all four groups has been declining for 16 years or more—much more for men, and much, much more for black men in particular. The participation rate of young black men has fallen fairly consistently since at least 1962, while the rate for non-Hispanic white men has “only” fallen over the past 33 years. Sizable participation gaps between blacks and whites remain.

figure1

As I discuss in my written testimony, labor force participation can decline for good reasons and increase for bad ones. In particular, taking into account rising school enrollment among young adults goes some way toward explaining the “problems” shown in Figure 1. African American enrollment rates have risen steadily over these 52 years, while white rates began rising in the mid-1980s. All four groups are equally likely today to be out of the labor force but in school. 

The labor force participation rate for white men in the 1960s was artificially low due to the inflated school enrollment inspired by the Vietnam draft and, to a lesser extent, benefits from the GI bill. With the end of the draft, many fewer white men enrolled in school. As a result, their labor force participation rose, opening up a gap compared with black men, among whom school enrollment continued to increase.

To illustrate the impact of taking school enrollment patterns into account, the next chart shows the percent of young adults in the labor force or in school. The number of young adults who we might worry are “idle” shrinks considerably versus in Figure 1. For instance, 43 percent of young black men were out of the labor force last year, but just 15 percent were out of the labor force and not in school. The declines in male labor force participation are much smaller after taking school enrollment into account, and the female declines disappear.

figure2

The American jobs machine is not fundamentally broken. A war on robots is premature (and always will be).

The remaining features of this chart to be explained also illustrate the importance of opportunity and work incentives. The chart shows a dramatic increase in labor force participation among black women between 1993 and 1997, the period during which unprecedented state and federal welfare reforms were implemented. Because the African American poverty rate and rate of single parenthood are significantly higher than the rates for whites, reforms to the safety net disproportionately affect them. 

Once receipt of federal means-tested cash assistance is taken into account, the historic and recent labor force participation gaps between black and white women disappear entirely:

figure3

The implication is that work-promoting safety-net reforms can successfully increase labor force participation and consequently, as other research on the 1990s reforms has shown, reduce poverty. 

As for young men, among those out of the labor force, the share indicating to federal surveyors that they want a job has declined since the early 1980s. Taking that into account, the share of young men out of the labor force, not in school, and who would like to work has been low and stable since at least the mid-1970s:

figure4

Because the decline in wanting a job was larger among black men, the black-white labor-force-participation gap largely vanishes after we account for this factor. Whether or not it is a problem that a rising share of men do not want a job depends on the reasons for this increase. Certainly the increasing number of men receiving federal disability benefits bears scrutiny and offers another way for policy to encourage opportunity-promoting incentives.

 

Scott Winship is the Walter B. Wriston Fellow at the Manhattan Institute for Policy Research. You can follow him on Twitter here.

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