Is there slack in the labor market?
Bottom line The labor market has strengthened considerably since the depths of the Great Recession. The unemployment rate (U-3) plunged from a 27-year peak of 10% in October 2009 to a recent 49-year low of 3.8% in May. But wage growth has been a stubborn laggard, as average hourly earnings have risen from a cyclical trough of 1.5% in October 2012 to only 2.7% in July. Many economists had expected that wage growth would have approached or exceeded 4% by now, as we’ve seen during similarly robust labor-market cycles over the past 30 years. So what’s the problem? As we study other key metrics, such as the participation rate and the labor impairment rate (U-6), it appears that there’s still slack in the system. If we can successfully shrink or eliminate it, wages should grow.
Participation rate too low U.S. labor force participation had troughed at 58.1% during the 1950s and 1960s, before significant numbers of women began streaming into jobs outside the home, which drove the participation rate up to a peak of 67.3% in January 2000. Two recessions later, with baby boomers starting to retire in force, the participation rate plunged to a 38-year cycle low of 62.3% in September 2015. We’ve recovered marginally over the past three years, back to 62.9% in July 2018. But it has largely been stagnant over the past five years.
To be sure, well-educated and highly skilled individuals remain in strong demand. But for many others, there’s a variety of possible issues contributing to this problem: a skills mismatch due to lack of training and education; the inability to move to new locations (in some cases because their home mortgage is under water); a record low fertility rate of 1.84 births per woman; a dysfunctional immigration system; the opioid crisis; and an overly generous social safety net.
Labor impairment rate can decline further The labor-impairment rate (U-6) also is known as the “total” rate of unemployment (or the underemployment rate), because it adjusts the U-3 to include discouraged workers and the underemployed. It peaked at 17.1% in October 2009 (7.1% higher than the U-3 at that time) and has since plummeted to a 17-year low of 7.5% in July 2018 (a spread of 3.7% above the U-3’s recent low). True, this U-6 data series dates back only to 1994. But when the labor market was strong late in 2000 and 2006, the difference between the U-3 and the U-6 was only 2.9% and 3.5%, respectively. If we’re correct that the unemployment rate can continue to decline from today’s 3.9% to 3-3.5% over the next 18 months, then the labor-impairment rate potentially could decline another 1-1.5%.
Opioid crisis In the 1990s, doctors began to prescribe these heavy-duty pain killers at a higher rate, as pharmaceutical companies reassured the medical community their patients would not become addicted. Today, an estimated 11.8 million people 12 years of age or older in the U.S. misuse opioids, with about 2.1 million people classified as addicted and more than 115 people dying each day from an opioid overdose. In states with high levels of opioid addiction, many employers are having trouble hiring otherwise qualified workers because many fail the pre-employment drug test. Also, existing employees may be high at work or have to take days off for family-related opioid issues, decreasing productivity.
The Center for Disease Control and Prevention estimates that the total "economic burden" of prescription opioid misuse alone in the U.S. is $78.5 billion a year, including the costs of health care, lost productivity, addiction treatment and criminal justice involvement. In 2017, President Trump signed an executive order to establish the President’s Commission on Combating Drug Addiction and the Opioid Crisis, and he later declared the opioid crisis a national public-health emergency. But he has yet to outline exact plans to deal with the crisis or how he will aid the states most in need.
Is the social safety net part of the problem? Companies report that some potential new hires turn down their offers for employment because they are competing against generous government programs, such as disability benefits, welfare, food stamps, housing assistance, Medicaid expansions and student loan forgiveness. From the prospective worker’s standpoint, it doesn’t make sense to work for less money than the value of their benefits. While these social safety net programs are crucial for those who truly needs them, they should be a temporary helping hand. We need to incentivize able-bodied people to use these programs as a stepping stone to get back on their feet, return to work with a reliable income and contribute to the economy.
Some lenient programs have no work requirement, which allows those who are able to work, but who have no intention of re-joining the work force, to receive benefits. In order to increase the participation rate, continue to reduce the U-3 and U-6 rates, and boost wages, we need to reform these six social safety net programs:
- Temporary Assistance for Needy Families (TANF) provides cash for a limited time to low-income families working toward self-sufficiency. But only 8% of their budget goes to work-related activities like job training, which we view as a critically important step to helping out-of-work people qualify for a new job in a new industry. If more money was allocated to education, training, apprenticeships and internships, it would increase spending in the short term. But it would also increase the long-term success rate of getting people off welfare and back into the work force by providing them with the opportunity to learn new marketable job skills.
- Social Security Disability Insurance (SSDI) program pays monthly benefits to those who have become disabled before retirement age and are unable to work. Coming out of the Great Recession, the federal government relaxed the rules for eligibility, and most SSDI recipients receive an average of $1,197 a month. Moreover, some people are able to receive these disability benefits while still working, if their job has a low enough salary. This deters some individuals from accepting more permanent jobs with higher pay, due to their fear of losing benefits. Also, SSDI has no work requirements, so those who really are able to work don’t have to.
- Supplemental Nutrition Assistance Program (SNAP), also known as “food stamps,” offers nutrition assistance to low-income individuals and families. In 2017, the government spent $70 billion on SNAP and other food-assistance programs, with about 47 million people (one out of seven) enrolled in the program at its peak (In May that dropped to 39.3 million). The average SNAP recipient receives about $123 a month (about $4.10 a day), with household benefits averaging about $247 a month. This money comes with very little restriction on what food can be purchased, so SNAP has come under fire for contributing to our country’s worsening obesity crisis. For example, restricting purchases of soda and candy and encourage the buying of fresh fruits and vegetables would be beneficial. The program also has no work requirements for eligibility.
- Housing & Urban Development (HUD) rental assistance helps about five million low-income families, seniors and people with disabilities get into affordable private or government-owned rental housing. While there is no work requirement to qualify, many using the program are employed. However, because their salary is not high enough to pay rent, this can encourage some people to keep their incomes low enough to qualify.
- Medicaid provides free and low-cost health benefits to low-income adults, children, pregnant women, seniors and people with disabilities. In 2014, as part of the Affordable Care Act (ACA), eligibility for Medicaid was expanded to individuals with incomes below 138% of the Federal Poverty Level (about $35,000). This encourages individuals to reduce their incomes in order to qualify for Medicaid, and there is no work requirement.
- Student loan forgiveness allows new graduates can cap their student loan payments at a percentage of monthly income. After 20 years, regardless of loan balance, they become eligible for loan forgiveness. If they work full-time in the public or nonprofit sector for a decade while making their monthly payments, the federal government forgives the remaining loan balance. So, recent graduates may take out large loans, reduce their income and accept public-sector jobs in order to qualify for an income-driven repayment plan, and therefore only pay a small amount of their large loan each month before it’s forgiven in 20 years or less
Guaranteed national income Although federal, state and local governments collectively spend more than a trillion annually on more than 126 different anti-poverty programs, the welfare system is not improving, according to the Cato Institute. So the idea of a guaranteed national income (also known as a universal basic income) has been gaining traction. The problem, from our perspective, is that receipt of a guaranteed income does not incentivize people to look for work.
Earned income credit In contrast, a better approach might be the expansion of the earned income credit, a refundable tax credit that was introduced in 1975, because it rewards low- and moderate-income people who work.
Research assistance provided by Federated summer intern Audrey Randazzo.