In the wake of the Great Recession, the unemployment has gone down amidst sustained, but anemic, job growth. The problem, however, is that the unemployment doesn’t tell the full story, as it doesn’t count those who are no longer looking for work. In this sluggish recovery, millions have stopped looking for work altogether, leading to a labor-force participation rate that has reached or hovers around historic lows for the past five years.
Robert Doar of the American Enterprise Institute writes in the Wall Street Journal:
While the Labor Department reported 292,000 net new jobs in December, the U.S. labor-force participation rate, 62.6%, has remained at near record lows after more than five years of steady decline. It increased a bare tenth of a percent over November. Meanwhile, labor-force participation in Great Britain stayed flat through the downturn; and for 25 to 54 year olds, it increased 2.2 percentage points from 2000 to 2014. Over the same period in the U.S., the labor-force participation from ages 25 to 54 dropped 3.1 percentage points.
Running New York City’s welfare program for six years in the Bloomberg administration until 2013 taught me that employment is central to the well-being of families and the economy. The fact that so few Americans are holding or actively seeking a job is a serious problem, especially for those at the bottom.
I am not an economist, but one likely reason for the dismal labor-force participation is that many U.S. assistance programs act more like work replacements than work supports. The U.K., by contrast, has been more active in pushing recipients toward employment.
In a study published last month, University of Chicago economist Casey Mulligan concludes that in response to the recession, several U.S. safety-net programs changed in ways that discouraged employment. Unemployment insurance, for example, was made more generous in multiple ways. Eligibility rules for food stamps were reduced, waivers from work requirements were granted, and the monthly benefit amount was increased.
The U.K.’s fiscal “stimulus” took a very different path. Increases to benefit programs were smaller, Mr. Mulligan notes, and largely involved cutting tax rates on income and consumption. To encourage more low-income individuals to work, Work and Pensions Secretary Iain Duncan Smith reformed the disability program to make more accurate and frequent assessments of recipients’ ability to work, and imposed benefit caps. He has also begun to roll out the Universal Credit system to help the unemployed find work faster, stay in their jobs longer and earn more.
“The American stimulus reduced average incentives to be employed” during the recession, Mr. Mulligan writes, “whereas the British stimulus did the opposite.” His research suggests that as of 2013 incentives to work in the U.S. still remained below what they were in 2007.
Mr. Mulligan is not alone. President Obama’s Council of Economic Advisers acknowledged in its 2015 Economic Report of the President that among the factors fueling the U.K.-U.S. divergence were British policy changes that “introduced more stringent job-search requirements for some welfare recipients.”
Mark Carney, the governor of the Bank of England, in a September 2014 speech cited reforms to Britain’s welfare system as a possible explanation for why the U.K. labor market is outperforming America’s and Europe’s. Increasing employment is vital for the flourishing of American families. Only 3% of working-age adults who work full time, year-round, are in poverty. To help low-income Americans move up, the U.S. should take a page from the British playbook by sending strong messages about the importance of work.
Read the full article at the Wall Street Journal.