Much of Washington’s ongoing economic policy debate focuses on reducing poverty, with many arguing to raise the minimum wage and expand government programs. But this focus ignores two simple truths.
First, poverty arises from sagging employment, our nation’s greatest economic challenge today and for the next several years. Most of those aged 18 to 64 who were in poverty in 2012 didn’t have as much as a single week of employment. Only about 11 percent had full-time employment.
Since the end of the Great Recession, the United States has experienced an unprecedented disengagement from the labor force. While some of the decline in labor force participation was expected due to an aging population, most was not. In 2013, participation was at its lowest point in more than 20 years for every age range between 20 and 54 years old. So, it is not retiring baby boomers but prime working-age individuals who are giving up on finding work.
This problem is far worse than previously anticipated by government forecasters. A recent economic forecast made by the Congressional Budget Office prior to the Great Recession projected that the aging U.S. population would hold the potential labor force down to about 160 million people in 2013. Instead, the United States had just 155 million people in the labor force last year—a decline in the participation rate 75 percent greater than anticipated.
The diminished labor force has serious implications for the economy. Using CBO’s methodology, last year’s five-million worker shortfall was equivalent to a $557 billion (or 3.3 percent) shortfall in last year’s potential national income.
To make matters worse, the evidence shows that new laws, such as the Affordable Care Act, and proposed new laws, such as an increase in the minimum wage, will make the workforce—already at a 35-year low—even smaller. CBO recently found that the ACA will significantly penalize work, causing an exodus from the labor force the equivalent of more than 2 million full-time workers in just a few years. The CBO also recently found that raising the minimum wage will increase employers’ cost of hiring and throw hundreds of thousands more Americans out of work.
The adverse effects of joblessness are real for American families. Studies find that even those who secure employment after losing a job experience reduced earnings for nearly 20 years afterward. The loss is even greater for the long-term jobless who stand the real risk of never returning to the labor force.
Throwing more government dollars at this problem won’t solve it. Despite record spending on programs to help the needy, a record 46 million Americans were in poverty in 2012. Federal spending alone on these programs was $750 billion in the 2011 fiscal year, up more than 30 percent from 2008.
Even in a highly polarized political environment, the importance of encouraging rather than deterring work is a principle well understood on both sides of the aisle. Earlier this year, President Obama’s National Economic Council Director Gene Sperling stated, “Both Democrats and Republicans have learned you have to … make sure about the incentives you’re creating, and that policies are better if they’re designed to reward work.” The White House also promoted its proposal to expand the Earned Income Tax Credit by arguing that it would “encourage and support work, especially among a number of groups with falling or low labor force participation rates.”
But as evidence proves time and again, policies that either raise the cost of hiring or reduce the incentive for work are counterproductive to fostering employment. Going forward, our economic policies must focus on avoiding and correcting such counterproductive policies and reengaging the millions of Americans who have left the workforce. Failing this, we will have permanently lower economic growth, slower income growth, and a continuing rise in the number of Americans in poverty.
Hall is a senior research fellow with the Mercatus Center at George Mason University and formerly the 13th commissioner of the U.S. Bureau of Labor Statistics. Blahous is a senior research fellow with the Mercatus Center at George Mason University and a public trustee for Social Security and Medicare.