Labour Force Participation Is Falling - Here Are Five Ways To Fix It

Lost amidst the furor over the Affordable Care Act and its effect on jobs is a much more worrisome trend in the labour market: the labour force participation rate continues to decline.

In a separate report released yesterday, the Congressional Budget Office (CBO) projected that the labour force participation rate would decline from 62.9% in the fourth quarter of 2013 to 60.8% by 2024.

This is after the rate fell from a pre-recession peak of nearly 66%. In fact, the labour force participation rate was above 67% in the late 1990s and early 2000s.

Why is this happening? A few reasons:

  1. Demographics – The Baby Boomer generation is getting older and retiring. As they do, a smaller percentage of the country will be working. Of the nearly three percentage points the labour force participation rate has dropped in the past six years, CBO attributes half of them to ageing of the population. This trend is only going to increase during the next decade.

  2. Workers Permanently Dropping Out of the Labour Force – This one was – and maybe still is – avoidable, but we need to act now. Millions of workers have been out of work more than 26 weeks. Many more have already dropped out of the labour force altogether and won’t return. CBO estimates that so far 0.5% of the drop in the participation rate is from workers permanently exiting the work force.

  3. Affordable Care Act – This was the big topic of conversation yesterday. CBO found that Obamacare will lead to a work reduction of the equivalent of more than 2 million jobs. BI’s Josh Barro ran through the three reasons for this yesterday:

    – One is good: the law allows workers to cut back their hours or exit the labour force without fear of being unable to purchase health insurance. This is commonly referred to as ‘job lock’ and health reform fixes it.

    – One is bad: The Medicaid expansion and means-tested subsidies increase the marginal tax rate on workers and disincentivize work. This is an unavoidable flaw with means-tested programs that no one has found a way around.

    – One depends on your views: Some people will work less because they can keep the same standard of living while working fewer hours. Liberals may view this as a good thing. Conservatives may not.

    We don’t know how much of work reduction is a result of each. If it is mostly the result of eliminating job-lock, then that is excellent. If it is the result of incentives, that’s bad.

However, what we do know is that the combination of those three effects will lead to a smaller labour force participation rate and slower growth. That will lead to more spending on entitlements, a reduced tax base and larger deficits. From 2018 to 2024, CBO projects that GDP growth will average only 2.2% due to those factors.

“In CBO’s projections, the growth of potential GDP over the next 10 years is much slower than the average since 1950,” the report says. “The difference stems primarily from demographic trends that have significantly reduce the growth of the labour force. In addition, changes in people’s economic incentives caused by federal tax and spending policies set in current law are expected to keep hours worked and potential output during the next 10 years lower than they would be otherwise.”

Obamacare may also increase productivity through reduced health care costs – or it may not. We don’t know and CBO did not attempt to quantify it. We do know that reduced labour force participation will be a drag on growth.

Here are five ways (some good, some bad) we can fix it:

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