The Truth About American Unemployment

In the wake of the financial crisis of 2008 and the Great Recession that followed, many economists worried that even if the U.S. economy improved, unemployment would remain high for years to come. Some warned darkly of a “jobless recovery.” Those fears have proved unfounded: since peaking at ten percent in October 2009, the U.S. unemployment rate has fallen by half and is now lower than it was in the years leading up to the crisis. Beyond the basic unemployment rate, a broad range of evidence shows that the labor market has largely returned to good health. Compared with earlier in the recovery, far fewer workers are underemployed or underutilized. Long-term unemployment has fallen steadily, from an all-time high of four percent of the labor force in early 2010 to just over one percent today. And adjusting for inflation, average hourly wages have been increasing for more than three years.

Yet one aspect of the labor market has stubbornly refused to improve: the labor-force participation rate. The share of Americans at least 16 years old who are working or looking for work remains three percentage points lower today than it was prior to the onset of the recession in December 2007. This is the case even though the unemploy­ment rate has improved, because the unemployment figure does not include those who have left the work force altogether.

Most of the decline in the labor-force participation rate has resulted from a large retirement increase that began in 2008. That year, the oldest baby boomers turned 62 and became eligible for Social Security. An aging population, however, cannot fully account for the drop: labor-force participation is down even among prime-age adults—those between the ages of 25 and 54.

That decline is not unique to this particular economic recovery. Instead, it is the continuation of a troubling pattern that began among men more than 60 years ago and among women about 15 years ago. In 1953, 97 percent of prime-age American men participated in the labor force; today, that figure is down to 88 percent. In 1999, after decades during which millions of women began to work out­side the home, 77 percent of prime-age American women participated in the labor force. Today, that figure has fallen to 74 percent. During both time periods, the United States experienced larger drops in labor-force participation rates and lower overall participation than most other advanced economies.

It is possible to view a drop in overall labor-force participation rates as a sign of progress: more people can now support themselves in retirement without having to continue working into old age, and many others are opting to stay in school longer, or raise families, or simply work less and enjoy more leisure time. But the evidence is mounting that the decline in prime-age participation represents a genuine problem for the U.S. economy and for American society. First, it poses a challenge to sustainable long-term economic growth, as a larger share of the population becomes more dependent on the economic output of a relatively smaller group of workers. Second, and even more important, is the human toll of involuntary joblessness. The loss of earnings from workers who move out of the labor force puts enormous strain on households, affecting not only workers themselves but also their spouses, children, and other dependents. Many people who stay out of work for long periods find that their incomes remain lower even when they ultimately manage to find new jobs.

The effects of joblessness also reach far beyond household finances. For decades, researchers have found that long-lasting unemployment can have severe consequences for mental health, physical health, and even mortality. Recent years have seen a massive increase in opioid drug abuse and an associated rise in overdose deaths and suicides among Americans without college degrees—the same group that has seen its labor-force participation decline most precipitously over the past five decades. In other words, a lack of work doesn’t simply mean less income. It can lead to more profound losses as well.

The good news is that there are a number of things that the government can do to help address the problem; indeed, the fact that the widespread decline in labor-force participation has played out differently in different countries only underscores the extent to which economic policy can make a difference. U.S. President Barack Obama has outlined a set of bold policies—many of which depart from simplistic orthodox prescriptions—that would significantly improve how the U.S. labor market functions and help more Americans obtain higher-paying jobs.

FROM FOOTNOTE TO HEADLINE

Labor-force participation tends to decline in recessions, as more people exit the work force and fewer people enter it. That short-term effect tends to fade away as the economy recovers. But in recent decades, longer-term trends have drowned out those short-term cycles. For example, after recovering from the recession of 1990–91, the U.S. economy enjoyed an almost unprecedented boom during the rest of the 1990s. Yet by 2000, neither the labor-force participation rate for prime-age men nor their employment-population ratio (a related measure that includes only those who are actively working and excludes those looking for work) had returned to its pre-recession peak.

That outcome—a recovery in the labor market but with fewer prime-age men in the work force—was not unique to the boom years of the 1990s. In all but one period of recovery since the mid-1950s, the employment-population ratio for prime-age men failed to reach the peak it had achieved before the previous recession. But few observers took note. As long as overall participation in the labor force was increasing—which it was from the end of World War II until 2000, as millions of women entered the work force and the baby boomers entered their prime working years—the decline in the labor-force participation rate for prime-age men remained at most a footnote.

In 1953, 97 percent of prime-age American men participated in the labor force; today, that figure is down to 88 percent.

But around 2000, women’s participation rates also began to fall. And around 2008, the first cohort of baby boomers began to retire. When the worst recession since the Great Depression hit at the same time, all three phenomena converged to form a perfect storm: the number of Americans either leaving the work force or failing to enter it exceeded the number who were joining it.

Since then, older Americans (those 55 and up) have seen their labor-force participation rates rise. This is at least in part because today, older people tend to work at jobs that are less physically demanding than the ones that older workers held in the past. Mean­while, younger people have experienced large drops in labor-force participation but have also begun to attend college at far higher rates than in previous decades. Consequently, the share of “idle” younger people (those neither in school nor working) has not risen over the long run, and although many Americans have delayed entering the work force, many more of them will have better skills when they eventually do.

SUPPLY OR DEMAND?

Because men’s participation in the labor force has been declining for decades, it makes sense to focus on that segment of the population when trying to understand what lies behind the overall long-term trend. All groups of prime-age men have experienced a drop in participation, but the less educated have suffered disproportionately. Those with at most a high school education saw their participation rate fall from 97 percent in 1964 to 83 percent in 2015. In contrast, the decrease over the same period for those with a college degree was far smaller: from 98 percent to 94 percent. (More recently, prime-age women have seen a similar pattern.)

One possible explanation for these declines is that the supply curve of labor has shifted—that is, more men simply do not want to work. In this vein, some have speculated that as more married women have entered the labor force, more of their husbands have decided to not work or have opted to take a substantial amount of time off to pursue job training or education or to care for children. But the data suggest that is not what is happening: in fact, less than a fifth of prime-age men who are not in the labor force have a working spouse, and that figure has actually decreased during that last 50 years, notwithstanding the large overall increase in the number of women who work. This owes, in part, to an increase in what economists call “assortative mating”: men and women who are successfully employed are increas­ingly coupling up with others who are successfully employed, rather than with partners who do not want to work.

Other proponents of supply-based explanations claim that govern­ment programs—disability insurance, in particular—have made staying out of the labor force more attractive today than in the past. Here again the data suggest otherwise: from 1967 until 2014, the percentage of prime-age men receiving disability insurance rose very little, from one percent to three percent, which accounts for only a small share of the eight-percentage-point rise in nonparticipation over this period. So disability insurance explains at most one-quarter of the fall in participation rates since 1967. But even that is likely an overestimate, because at least some of the increase in the number of men receiving disability insurance payments is probably a consequence of men who are unable to work leaving the labor force rather than a cause of it.

What is more, over the same period, other government assistance programs became increasingly hard to access. This was particularly true for people who were out of work, as many state governments established stricter eligibility standards for unemployment insurance and the federal government cut spending on traditional cash welfare payments. Meanwhile, few nonworking, able-bodied adult men without children are now eligible to receive nutritional assistance. Government aid thus explains at most only a small fraction of the drop in prime-age male labor-force participation, casting doubt on another set of supply-side theories.

The most significant weakness of labor supply explanations is that they account for only one piece of data: the drop in the quantity of labor supplied. By itself, that decline would tend to lead to rising wages as workers became more scarce. Yet in recent decades, less educated Americans have actually suffered a reduction in their relative wages (the amount they earn compared to what other groups do). From 1975 until 2014, those with a high school degree or less watched their relative wages fall from more than 80 percent of the amount earned by full-time, full-year workers with at least a college degree to less than 60 percent. This fall would not have happened if a large swath of less educated men had simply chosen to stop working and to rely on their partners’ incomes, disability insurance, or something else—a shift that, all things being equal, would have led to an increase in their relative wages and not a decrease.

A lack of work doesn’t simply mean less income. It can lead to more profound losses as well.

The inability of supply-side explanations to account for both falling labor-force participation and lower relative wages suggests that something else is going on: the demand curve for labor has shifted, or has at least shifted more than the supply curve. In other words, falling demand for less skilled workers has simultaneously reduced their employment and lowered their wages.

Economists do not have a clear answer for why the demand for lower-skilled labor is falling. One possible cause is the long-term drop in manufacturing jobs that has resulted from technological advances and the globalization of markets. This decline has elimi­nated millions of U.S. manufacturing jobs over the past several decades, leaving many people—mostly men—unable to find new jobs. Another potential factor is what economists call “skill-biased technological change”: advances that benefit workers with certain skill sets more than others. Such changes have increased the demand for more skilled workers while hollowing out jobs in the middle to lower end of the skill distribution.

Another possible reason that the demand for workers has fallen is the increase in the number of previously incarcerated people in the population—a byproduct of the massive growth in recent decades in the number of Americans behind bars. The vast majority of those who have served time in prison are men, and they tend to face substantially lower demand for their labor once they are released. In many states, the formerly incarcerated are legally barred from a significant number of jobs by occupational licensing rules or other restrictions on the hiring of those who have been incarcerated.

FLEXIBLE VS. SUPPORTIVE

A wide range of developed countries have experienced changes in labor demand similar to those in the United States, with increasing demand for skilled labor and a reduced share of manufacturing jobs. But judging from the available data, between around 1980 and around 2010, the United States underwent both a larger decline in prime-age male participation and a more significant increase in economic inequality than nearly any other member of the Organization for Economic Cooperation and Development (OECD). This suggests that government policies and institutions play a large role in shaping how an economy responds to such changes.

To understand that role, it is helpful to compare the United States to France, a country with a very different set of institutions and rules. Economists describe the United States’ labor market as being far more “flexible” than France’s. In the United States, governments and institutions such as labor unions place relatively few barriers in the way of employers who want to change whom they employ and what they pay. In France, on the other hand, “supportive” labor-market policies are intended to prop up both employment levels and wages. In the United States, 12 percent of employees are covered by collective-bargaining agreements, and it is relatively easy for private-sector firms to hire and fire workers. In France, by contrast, more than 90 percent of workers are covered by collective-bargaining agreements, and most employees enjoy a substantial set of protections, including generous severance payments and restrictions on dismissal. Furthermore, the minimum wage for adults in France is around 50 percent higher than the federal minimum wage in the United States.

Government aid such as disability insurance explains at most only a small fraction of the drop in prime-age labor-force participation.

Some argue that the American-style labor market makes it easier for everyone who wants a job to get one, whereas policies such as a minimum wage introduce inefficiencies and inflexibilities into the economy. By that logic, the U.S. labor market should easily outperform the French labor market in terms of employment. And yet, the proportion of prime-age men in the labor force is five percent lower in the United States than it is in France. Even taking into account France’s higher unemployment rate, France still has had a higher percentage of prime-age men in jobs than the United States has in every year since 2001.

The U.S.-French comparison is not an isolated example. The United States has the lowest level of labor-market regulation, the fewest employment protections, and the third-lowest minimum cost of labor among the OECD countries—attributes that should encourage better labor-force participation, according to conventional economic wisdom. But the United States ranks toward the bottom of OECD countries in terms of the percentage of prime-age men actively working, and most of the countries that rank lower—such as Greece, Italy, Portugal, and Spain—are currently suffering from historically high overall unemployment rates. This poor U.S. performance reflects a long-term trend: since 1990, the United States has had the second-largest increase in prime-age male nonparticipation among OECD members. The gap between theory and reality results partly from the fact that the U.S. government does far less than other countries to support workers. The United States spends just 0.1 percent of GDP on so-called active labor-market policies, such as job-search assistance and job training, much less than the OECD average of 0.6 percent of GDP and less than every other OECD country, except Chile and Mexico, spends.

The picture is no better when it comes to the labor-force participation rates of American women. The proportion of prime-age American women currently working places the United States at 26 out of the 34 OECD countries. The OECD countries that fare worse than the United States on this measure either have unusually high overall unemployment rates (the peripheral European economies, for instance) or tend to have different cultural norms relating to women taking part in formal employment (Mexico and Turkey, for example). Moreover, for the past quarter century, most other OECD countries have seen the participation of prime-age women increase, whereas in the United States, it has moved in the opposite direction.

This, too, stems partly from the way that the greater degree of flex­ibility for employers in the U.S. labor market discourages participation, particularly for women. Women everywhere bear a disproportionate burden when it comes to childcare and housework. But the United States is the only OECD country that does not guarantee paid leave for family reasons, such as the birth of a child, or for illness. And while the gross cost of U.S. childcare is close to the OECD average, subsidies for childcare in the United States are considerably lower than the OECD average, which means that the net cost of childcare in the United States is among the highest of any advanced economy. Moreover, although the United States generally has low tax rates, the U.S. tax system imposes a relatively high rate on secondary earners, which creates a disincentive for stay-at-home parents to enter (or reenter) the work force.

Many other advanced economies have serious problems in their labor markets, especially when it comes to their youngest and oldest workers and women’s representation in management positions. But the difference in prime-age labor-force participation between the United States and OECD countries with less flexible labor markets suggests that Americans might have something to learn about creating the conditions for meaningful employment. It also reveals a flaw in the standard view about the tradeoffs between flexibility and supportive labor policies. Contrary to the conventional wisdom, it is necessary to make labor markets more supportive of workers in order to make those markets more efficient in ways that would benefit employees and businesses alike. But to do so, the United States will need to move beyond outdated prescriptions for boosting employment and participation in the work force.

WORK TO DO

Just as there is no single cause for the decline in the labor-force participation rate, there is no single way to address it. And the problems and solutions associated with the decline vary from country to country. But in the United States, Obama has decided to tackle the issue with a set of proposals that would create meaningful work opportunities for more Americans.

As the past eight years have made clear, the effect of recessions on the labor market is becoming only more pronounced. One way to prevent worse outcomes in the future would be for the federal govern­­ment to take steps that would increase aggregate demand in the economy. Investing more in public infrastructure, for example, can create well-paying employment opportunities for workers without higher education. To this end, Obama has proposed ambitious new investments in clean infrastructure that would help build a twenty-first-century national transportation system.

Obama is pushing for bold policies that depart from economic orthodoxy and would significantly improve the U.S. labor market.

To protect the unemployed during future economic downturns, Obama has also proposed establishing an automatic extension of the amount of time that people can claim unemployment insurance during a recession, providing up to 52 additional weeks of benefits in states suffering from rapid increases in unemployment (for a total of up to 78 weeks in most states). The government can also help deepen the “connective tissue” in the labor market by reforming community colleges and training systems to help place people in jobs, providing recipients of unemployment insurance with more help in finding new jobs, and broadening the eligibility requirements for unemployment insurance.

Other reforms to the unemployment insurance system would also help more people find work. Right now, workers receive unemployment insurance when they are laid off, but most do not get assistance when their hours are reduced. That discour­ages employers from avoiding layoffs by temporarily reducing hours across the board when demand for their products or services falls and also discourages workers from accepting lighter schedules. One solution to this dilemma would be to arrange the unemployment insurance system to promote work sharing by allowing groups of workers whose hours were temporarily reduced to receive unemployment benefits to make up for some of their lost earnings. Obama’s most recent budget provides grants and additional incentives to create work-sharing programs for states that haven’t already done so. By removing the incentives for firms to slash jobs rather than merely cut back on hours, these programs would help prevent job losses during an economic downturn, as a similar program did in Germany during the most recent recession.

In addition to his plan to promote work sharing, Obama has also proposed a system of wage insurance that would replace up to 50 percent of lost wages (up to a limit of $10,000) for two years for unemployed workers who take new, lower-paying jobs. Such a system would offer protection against reduced earnings and create an incentive for the unemployed to get back into employment quickly and to remain in the work force.

Since the labor-force participation gap between the less educated and the more educated has grown over the past several decades, strength­ening the U.S. educational system and helping more Americans finish high school and college have become more important than ever. The Obama administration has sought to do this by expanding high-quality early education, maintaining rigorous standards for students, sup­porting successful teachers, making college more affordable, and holding institutions of higher education accountable to their students.

There are also a number of changes to federal tax policy that would make it easier for people who want to work to do so. For instance, secondary earners are more responsive to tax rates than primary earners, and they face higher rates in the United States than in most advanced countries because the U.S. tax system is largely based on household income rather than individual income. Obama has proposed creating a new tax credit that would reduce the effective penalty imposed on secondary earners. In addition, boosting the Earned Income Tax Credit for childless workers and noncustodial parents—a move supported not only by Obama but also by the Republican Speaker of the House, Paul Ryan—would make work more rewarding for lower-skilled individuals and thus encourage participation in the work force.

Federal policy can also help ensure that flexibility in the U.S. labor market benefits employers and employees alike. Improving flexibility in the labor market doesn’t just mean making it easier for the unemployed to find work; it also involves assisting people who are currently employed. Some important steps along those lines would be to require the provision of paid family leave and guaranteed sick days and to provide more government subsidies for childcare and early learning programs—both proposals that Obama has supported. In fact, a recent study by the economists Francine Blau and Lawrence Kahn found that the labor-force participation rate for American women would be around four percentage points higher if the United States adopted family-friendly labor-market policies comparable to those of other OECD countries.

Another obstacle to improving the U.S. labor market is the fact that around a quarter of jobs now require an occupational license, up from just five percent in the 1950s. In some states, one must obtain an occupational license to work as a florist or an interior decorator, for example, even though it is highly unlikely that licensing in such professions meaningfully protects consumers. State-level reforms of occupational licensing would help make it easier for people who lose one job to move to a new one, possibly in a new location, and a number of states have begun to take action in this area. And repealing burdensome local land-use restrictions would increase the supply of housing, making it easier for workers to move to pursue better opportunities.

A number of far-reaching initiatives in other areas would also have a profound positive effect on the U.S. work force. Reforms to the criminal justice system would mitigate the negative effects of mass incarceration on labor-force participation. The most important steps supported by Obama include reducing mandatory minimum sentences (especially for nonviolent offenders), improving inmates’ prospects for reentry into the labor force by providing them with better educational and training opportunities while in prison, and placing fewer restraints on hiring ex-offenders. Comprehensive immigration reform would also help. Although it would not directly boost the labor-force participation rate of native-born workers, immigration reform would raise the overall rate by bringing in new workers of prime working age, offsetting some of the larger economic challenges associated with a shrinking work force.

Finally, despite the claims of some economists, growing inequality is neither a necessary cause nor an inevitable consequence of better economic performance, and some evidence suggests that steps to reduce inequality (or to at least slow its growth) would also improve labor-force participation. To that end, the federal government must raise the minimum wage and help ensure that workers have a strong voice in the labor market by supporting collective-bargaining rights. These policies would help level the playing field for employees, increasing the incentives to work.

The long-term decline in labor-force participation is a serious challenge, one that the United States must tackle as it moves farther away from the shadow of the Great Recession. The decline calls into question economic orthodoxy and provides an opening for less traditional policies that would benefit American firms, families, and workers alike by stemming the drop in the size of the U.S. work force. Such policies are not, in the long run, zero-sum: by strengthening incentives to participate in the labor market, they would increase the efficiency and performance of the U.S. economy, benefiting everyone.

The next half century will not offer the favorable demographics and mass entry of women into the labor force that the last half century supplied. So to promote a stronger, larger U.S. work force, policymakers must take action and recognize that adherence to simplistic traditional policy prescriptions would leave the United States facing a weaker economic outlook for decades to come.