Sunday, April 6, 2014

Why Has The Labor Force Participation Rate Declined In The US?

Glenn Hubbard is the Dean of NYU's Business School, and he was an economic adviser to George Bush and Mitt Romney.  The Wall Street Journal provided him with a platform to explain why the labor force participation rate has declined in the US.  Hubbard begins his explanation by arguing that Obama's fiscal stimulus failed to create enough demand in the economy.  Monetary policy may have kept the recession from worsening, but it did stimulate enough demand either.  Fiscal policy and monetary policy are effective when we have cyclical unemployment but they are not effective when structural problems in the economy are responsible for unemployment and the decline in the labor force participation rate.  He then moves to his list of structural problems in the economy and he suggests some reforms that might address those problems.

The most simple explanation for the drop in labor force participation rate is that the unemployed have not been able to find jobs.  We also know that the long term unemployed are less attractive to employers.  Hubbard has a more complex explanation.  He places the blame on government policies which decrease the incentive for workers to take the jobs that are available to them. He also argues that the unemployed lack the skills that are required by employers.  His list of government policy failures is extensive.  It was a mistake to extend unemployment benefits  because they reduce the incentive to work.  Social Security disability benefits are also a problem because they discourage the disabled to work. The payroll tax also discourages elderly workers from taking the jobs that are available.  He argues that they would have a greater incentive to work if the payroll tax were eliminated because it would increase their net pay.  The earned income tax credits only apply to families so they do not encourage single worker to take the low paying jobs on offer.  Hubbard acknowledges that globalization has made low paying jobs more scarce in the US, but his solution is to provide training to low skilled workers so that they can compete for the jobs that have gone overseas. 

For some reason Hubbard also argues that the Affordable Car Act is responsible for the decline in the labor force participation rate.  He echoes a claim by many of the Republican's in Congress.  Hubbard provides a graph of the labor force participation rate which makes a strong case against his claim.  The labor force participation rate dropped steeply at the onset of the recession and it continued to fall during the slow recovery.  The Affordable Car Act, which has only recently become available, cannot be responsible for the decline in the labor force participation rate.

In summary, the lack of jobs is not responsible for the decline in the labor force participation rate according to Hubbard.  He pus the blame on government policies which discourage the incentive to work and he argues that the labor force lacks the skills demanded by employers.  Dean Baker responded to the Hubbard article and the comments that follow his post suggest that Hubbard's economics are clouded by his ideology. 

No comments:

Post a Comment