Increasing labor force participation critical to hitting growth targets
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With the incoming President-elect promising future growth rates of 3-4 percent per year, one key determinant is the size and growth rate of the labor force. The U.S. labor force participation rate, the proportion of civilians (aged 16+) either employed or actively looking for work, now stands at just 62.7 percent.

Economists have long noted the positive relationship between a growing labor force and GDP growth. The Congressional Budget Office (CBO) has estimated that growth in the labor force from 1948-2001 added around 1.7 percentage points per year to the average annual growth in real GDP.

Some economists have dismissed this decline in the labor force as purely cyclical, resulting from the economic downturn, but this long-term decline precedes the Great Recession by almost a decade.

Other economists have suggested that the declining labor force is attributed to growth in the retired population, as baby boomers have started to drop out of the workforce. But when looking at the proportion of prime-age men in the workforce, one can also see a long-term increase in inactivity. This is not simply a pattern of retirement.

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Barriers to employment opportunities, increasing welfare dependency, stringent labor market regulations and an intense regulatory enforcement regime have all significantly contributed to the long-term decline in labor force participation. 

In order to grow the labor force and unleash the growth potential of the U.S. economy, the new administration would be wise to consider some policy remedies aimed at lowering barriers and inducing the inactive population back to work. 

Reforming the welfare system in a way that encourages people to move back into work is an obvious solution for labor force growth. The current system is too complex and is lacking sufficient incentives to encourage people on welfare to start paid work or increase their hours.  

In particular, the Social Security Disability Insurance Program has seen a drastic increase in beneficiaries in recent years. With less than 2 million beneficiaries claiming SSDI in 1970 and more than 10 million beneficiaries in 2015, almost the entirety of growth in beneficiaries is from disabled workers. 

 

 An applicant’s eligibility for SSDI is determined using a grid of medical vocational rules. These guidelines apply much looser standards for applicant’s eligibility and are an important part of the explanation for increased disability awards in recent years.  

The medical vocational grid guidelines make it easier to award SSDI benefits to older workers, unskilled workers and even non-English speakers. Ultimately, these guidelines should be eliminated and replaced with a fairer, simpler, and more uniform system for determining eligibility. 

While such reforms would help remedy the United States’ underlying problem of labor force inactivity, they only address the tip of the iceberg.

Labor market reforms that induce employment over welfare and create opportunities for the young and unskilled are also essential to grow the labor force.

The new administration should try to tackle social welfare burdens, stringent labor market regulations and monetary disincentives. Only by growing the labor force will the new administration have any chance of reaching its target growth rate of 3-4 percent per year. 

 

Jack Salmon received his MA in Political Economy from Kings College after graduating from the University of Essex with a BA in History and Politics. He has previously worked at the Cato Institute through the Koch Internship Program and the Competitive Enterprise Institute through the Koch Fellowship Program.


 

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