What the Labor Pool Collapse Means

Where have all the workers gone?

One of the most bizarre happenings in our current economic environment has been the surprising collapse of the number of people in the labor pool. This reality adds a sting to the unemployment numbers. They are falling bit by bit, but so is the total pool of people who are even part of the count. Once people drop out, they disappear economically.

The trend for men in particular goes back half a century, but for all groups, the dropout rate accelerated dramatically after 2008:

Writing in The Wall Street Journal, economist Richard Vedder makes a rather obvious point — obvious once it is stated. If people aren’t working, they aren’t producing. If they aren’t producing, the economy is not growing. For this reason, he attributes a substantial part of the slow growth to this rather plain reality: Millions of people aren’t doing anything.

“If today, the country had the same proportion of persons of working age employed as it did in 2000, the U.S. would have almost 14 million more people contributing to the economy. Even assuming that these additional workers would be 25% less productive on average than the existing labor force, U.S. gross domestic product would still be more than 5% higher ($800 billion, or about $2,600 more per person) than it actually is.”

Makes sense.

The larger question concerns how and why this happened. I have my own theories about this, but let’s first look at the evidence that Vedder himself comes up with to show that most of this can be explained by transfer programs like food stamps, disability insurance, student subsidies, and unemployment payments.

Let’s look at each.

Food stamps were a slightly goofy subsidy to the big agriculture lobby back in the 1960s, fobbed off on the public as somehow essential to ending hunger. Today, food is cheaper and more plentiful than ever, and American waistbands reveal this fact. People talk about the plight of the hungry, but it is mostly a myth. We are the most stuffed society in the history of the world.

Yet even now, 47.5 million people are receiving food stamps, with an average benefit of $125 per month. That’s 15% of the population. That’s some pretty serious grocery purchases there. Big Ag is very happy about this. Must be nice to a have a pool of guaranteed customers who live off others.

Vedder makes the point that a major reason people work is to eat. If the eating part is guaranteed, why bother working?

With disability benefits — the government program most famous for massive fraud and abuse — it’s the same story. Back in 1990, only 3 million people took checks. Today, that number is through the roof, so much that almost 8.6 million people get checks that provide the equivalent of a full-time income. And this has happened at a time when medical technology is better than ever at dealing with real disability.

Next comes the whole student racket. Back in 2000, not even 3.9 million young people received Pell Grant awards to go to college. Today, the number is approaching 10 million. Going to school is a great way to avoid having to work. Hey, but maybe all these desk sitters are absorbing fabulous information that they will soon spring on society in the form of dazzling innovations and productivity, and we will look back and say, wow, that was worth it after all.

OK, stop laughing.

Next comes unemployment. In the past, it was never possible to stay unemployed for a full year and still receive benefits. Now it is normal. Congress just keeps extending benefits, probably out of fear that if these people are pushed into the labor market, unemployment will go up and wages will fall and there will be a revolution. It’s literally the case that government is paying millions of people to shut up and stay at home.

What are we to make of Vedder’s picture of the workforce? One gains the image of many millions of people sitting at home drawing checks, pretending to be students, stuffing their faces with tax-funded potato chips, and otherwise just living it up. If that’s really true, that’s not really suffering, is it? The data reported above indicate no real disaster, except for those of us footing the bill.

I actually don’t think this is entirely the right way to look at it. The reality is that the labor market is broken today because it is not really a market in any normal sense. Many people are shut out due to more substantial problems. People are saddled with debt, terrified to lower their wage expectations, and completely shut out of a system that doesn’t seem to accommodate the old expectations.

Think back to 100 years ago. Unemployment was practically unknown. Why? Because there was (and there still is) stuff to do and people to do it. So long as employers and employees could negotiate without a gigantic state interfering with them, everyone was happy. There was no income tax. There were no added benefits. There were no impositions on the right of association. People bounced from job to job, taking 100% of their earnings in the form of real money.

That was a great system while it lasted. It initially came about after the end of the feudal period and with the rise of the capitalist middle class. Average people actually made money for the first time in the history of the world, and it was pretty cool. There was no shortage of jobs.

That whole system came to an end during the Great Depression and World War II. It began when the government dared to decide who could and could not work and under what terms. This was the first step in what amounted to the nationalization of the labor pool. Kids could not work. No one could work apart from a government-dictated wage. The amount of time they could work would be regulated.

Then, in World War II, two additional changes came about. Taxes would be taken out of the paycheck by the government, and the taxpayer would get back later whatever the government didn’t keep. Millions of people began to think of the government as their benefactor. Wage controls then led some large companies to pay employees in benefits like health care, a practice that was later pushed more broadly.

This is not the way the free market works. Workers prefer to be paid with money, plain and simple. That’s because money is the most liquid good. It can be converted to anything else. It is what gives choice and personal empowerment.

Today, the government’s system is pretty well locked down and super sticky. The costs of bad hires are very high for employers, so they are super cautious. The clarity of the work contract is gone. The market is not being allowed to operate.

Adding to the problem is the issue of housing. Many of the millions of people who have dropped out also own homes they can’t sell at a profit, which means that they are not in a position to move. The house works as a kind of brake on personal progress.

This is a story of demoralization created not by a few government programs, but by hundreds, among which is the boom and bust cycle itself. The excluded workers are victims, and no less so because of their privilege of drinking unlimited amounts of soda at your expense.

Ending this problem is going to require doing far more than cutting food stamp allocations and cleaning up disability graft. It will require a complete dismantling of 100 years of attempts by government to do things to help American workers.

Sincerely,
Jeffrey Tucker

Original article posted on Laissez-Faire Today