Saturday, October 18, 2014

LABOR | Low Participation II (Job-Finding and Disability)

Chart 1. BLS Data on Labor Force Participation Rates
(FRED chart, St. Louis Federal Reserve Bank).
I am continuing to think about the low U.S. civilian labor-force participation rate, encouraged by Marcus Roberts and the other busy demographers at MercatorNet in Auckland, New Zealand.

If the stubbornly low employment-population ratio (and the still-declining labor-force-participation rate shown in Chart 1) are explained by demographic shifts in work-family choices - such as men and women taking more time off from working as a lifestyle decision - then government policies may not require change. We might just have to accept that we will have fewer people working.

However, I just read a summary of a Working Paper (#20183) by Robert E. Hall, "Quantifying the Lasting Harm to the U.S. Economy from the Financial Crisis." It appears in the National Bureau of Economic Research (NBER) October Digest. Hall suggests two interesting explanations for the continuing low labor-force-participation rates, as of 2013, beyond the six mostly demographic ones that I suggested.

1. "Job-finding rates" are low. When recessions or job interruptions are short, workers can go back to what they were doing before. But when a high level of unemployment has occurred over a long period, some jobs are being destroyed completely in the interim. Workers who have been laid off can't shift over to another employer. Many examples of clerical jobs displaced by computers come to mind, such travel agents handling low-cost travel who are being displaced by increasingly user-friendly internet reservation systems.

Chart 2. Applications for Disability Aid and Acceptances,
2. Disability (SSI) and food stamp program beneficiaries are growing rapidly. The number of  receiving SSI (disability) and food stamp assistance has, says Hall, been increasing persistently. The high implicit taxes on earnings that result from losing benefits means that this group of people has very little incentive to participate in the labor force.


The number of applications for disability assistance has certainly been increasing, at least through 2010 (see Chart 2). But the percentage of applications that are being rejected is increasing as well. More than half of applications were accepted in 1999 whereas in 2013 the acceptance rate was down to one-third. The number of applications that are being accepted has been declining since 2010.

The NBER Digest summary doesn't provide policy recommendations, but the demographic, job-finding and disability theories have some interesting implications.
  • To the extent that the continued low labor-force participation rate (despite lower unemployment) reflects personal lifestyle choices or the changing composition of the American work force, government action may not be very useful. 
  • But if the job-finding problem is driving low labor-force participation, it might be useful for the Department of Labor to educate displaced workers to the changing needs of the workplace and get across the fact that experience in a skill that is no longer called for isn't going to count for much in a new job.
  • For displaced workers to get back into the work force it may require working hard to stay relevant, especially in tech-related jobs. 
  • Returning to the work force may also require a lowering of income expectations and a conscious effort to be tolerant of "diversity", which means in part more co-workers looking and behaving in ways that were not usual five or ten years ago. 
  • The job-finding problem might be partly addressed through entrepreneurship training, although entrepreneurs typically won't show up on payroll-jobs data (which are generated from filings for state unemployment-insurance programs) until they start paying themselves. At the same time, they also probably won't show up in the household surveys as unemployed or looking for work. Entrepreneurs may or may not appear in the labor force.
  • The theory that disability payments make it unattractive to work raises the question of the direction of causality. One reason that disability enrollments are rising could be that those who are unemployed and are discouraged by the lack of good jobs turn to disability programs when their unemployment compensation expires. So one reason for the larger number of disabled is the high unemployment rate. 
  • This causality would also help explain the higher rejection rates - the long-term unemployed are casting around for a replacement for their expiring unemployment checks and disability might look like a solution. 
  • We should have enough data on earnings of disabled people to assess whether it would make sense to reduce the earnings penalty, i.e., the loss of benefits tied to levels of earned income.
Thank you for reading. Please comment - john (at) cityeconomist (dot) com.