Declining Desire to Work and Downward Trends in Unemployment and Participation

That is the next (and for me final) NBER paper from the macro workshop, by Barnichon and Figura, the pdf is here.  Their main claim is quite startling, and very important if true.  Here is the abstract:

The US labor market has witnessed two apparently unrelated trends in the last 30 years:a decline in unemployment between the early 1980s and the early 2000s, and a decline in labor force participation since the early 2000s. We show that a substantial factor behind both trends is a decline in desire to work among individuals outside the labor force, with a particularly strong decline during the second half of the 90s. A decline in desire to work lowers both the unemployment rate and the participation rate, because a nonparticipant who wants to work has a high probability to join the unemployment pool in the future, while a nonparticipant who does not want to work has a low probability to ever enter the labor force. We use cross-sectional variation to estimate a model of nonparticipants’ propensity to want a job, and we find that changes in the provision of welfare and social insurance, possibly linked to the mid-90s welfare reforms, explain about 50 percent of the decline in desire to work.

Did you get that last bit?  Wild.  The Clinton-era welfare reforms lowered the incentive to work.  Another part of the paper explains the possible mechanisms in more detail:

We conjecture that two mechanisms could explain these results. First, the EITC expansion raised family income and reduced secondary earnersís (typically women) incentives to work. Second, the strong work requirements introduced by the AFDC/TANF reform would have, through a kind of “sink or swim” experience, left the “weaker” welfare recipients without welfare and pushed them away from the labor force and possibly into disability insurance.

The authors have strong reputations, but is it true?  Stay tuned, and look for my live-blogging in the comments section of this post…

Comments

A surprising conclusion concerning EITC which one would think would raise the incentive to work although perhaps something in the rules about household income reduces the marginal incentive. This could be important if the EITC is to be used instead of a higher minimum wage to encourage work among and transfer income to low income workers,

What I recall seeing when I did volunteer tax prep for low income folks is that quite a few people who earned EITC only worked a fraction of the year.

For some that was intentional. I heard quite a few hard luck stories but I also encountered som very sophisticated people. We had people trying to buy SS# of children in our office. Others would simply come in with ssn # of relatives. Not sure how effective these frauds are in reality though.

Some words to type into your search engine: Backward bending supply curve for labor.

The EITC is a bit complicated to game, except that it obviously discourages marriage of low income women to employed men. I just don't see many poor people quitting their jobs in October because suddenly EITC gives them a 60% marginal rate. I could be wrong.

AFDC might have been more encouraging to work in its old form because it was fairly easy to jump on and off of. Disability takes years to get if you are getting it without an obvious physical disability, and can be lost forever by taking full time employment. Disability also pays a lot more than afdc ever did, roughly twice as much, so is an even bigger risk to lose.

Unless specific action is taken to backfill disability with funds from social securities old age and survivors trust fund, there will be an across the board cut of payments of about 20%. Aside from the policy merits, economists should be excited about the very clean natural experiment this sudden cut will represent.

Magnus Carlsen already has won his game, and this session hasn't even started yet. I tried telling the participant next to me that the Rockets and Clippers are not serious contending teams, perhaps he thought I was crazy...The presentation is now underway...

That will probably be the most useful piece of information conveyed in the hotel this weekend.

How do you define a serious contending team? Bovada has Rockets at 14/1 to win the championship.

Overall too many presentations spend too much time on introductory matters...I would prefer to see them start with the most interesting part of the paper and work backwards. By the way:

"Americans Not Working Exceeds 93M for First Time; 62.7% Labor Force Participation Matches 37-Yr Low"

https://twitter.com/KLSouth/status/588575391142412288, so this is an issue of growing interest. Do note however that a lower lfpr does not have to be bad per se, though at current margins it often seems to be.

A major shift in labor force participation has been for young people:

"Workers between 16 and 24 years of age constitute the demographic group that has experienced one of the most substantial declines in labor force participation. Figure 1 shows participation rates for these youth since 1955. The LFP rate for this group increased more or less steadily until 1979, reaching 68.8 percent in September 1979, then remained above 65 until 2000 before starting its sharp decline.1 The rate was down to 54.9 percent in September 2014."

https://www.stlouisfed.org/publications/regional-economist/january-2015/youth-labor-force?&utm_source=Twitter&utm_medium=SM&utm_campaign=482&utm_term=labor&utm_content=re

When tax cuts put more money in your pocket, why work? Just work to get conservatives elected who will cut taxes and put more money in your pocket for you to spend more wisely than government.

Given conservatives blame liberals for all the poverty, all the more reason to work to elect conservatives who will cut your taxes and put more money in your pockets to spend more wisely than government....

Somehow, not even Obama saying "tax cuts put more money in your pocket" was enough to get conservatives to reject their talking point cooped by Obama, although all the tax cuts Obama signed did become "wasteful government spending that failed to create jobs."

Economists talk of incentives, but when it comes to incentives to work, getting $1 per hour is better than $10 per hour because more employers will offer $1 than $10, and if the offer must be $15, then there will be no incentive to work because there will be no job offers.

Of course, employers will not hire more workers if workers come in with twice as much money to spend because their pay check is twice as large at $15 per hour than at $7 - employers will cut their workers in half.

Since Reagan sold America on free lunch economics: wealth is created by lower wages and infinite growth in debt....

Low skill immigrants are obviously depressing the labor force participation of native born youth. When I was a teen in the late 90s, with under 2% immigrants in my town and very low unemployment, fast food companies had to jump through a ton of hoops to hire 14 and 15 year olds, who could only work 15 hours a week during the school year, but they did it anyway because of the tight labor market.

I agree that young adults have been and are continuing to be squeezed out of work.

Immigrants (both those within the 16-24 age groups and older adults) take many of these low paid jobs. In addition, we now have many more native born adults competing for these jobs.

Finally there's all the unpaid internships which can be a relative waste of time and lose of money that many kids in school could really use.

Those of course are my comments, not taken from the presentation...I am still waiting for the key part of the paper to emerge. My worry about the Clippers is that no one on that team really wants to win. They weren't much worse without Blake Griffin, DeAndre Jordan grabs rebounds away from his own teammates, and for his supposed quality Chris Paul has never gotten far in the playoffs, remember how well LeBron did with those mediocre old Cleveland teams? Wesley So seems to be doing OK in a game against Kramnik, a game which supposedly should be playing to Kramnik's strengths and his weaknesses. That is a good sign for him.

Now we're getting to the welfare reforms of the 90s...don't forget to follow Mark Thoma's tweets of this same event, https://twitter.com/MarkThoma
We are starting to get into interesting territory, although I do not see a strong case being made for their interpretation, other than that it seems to fit the data. I'm not hearing talk of what a discriminating test, using other data if need be, would have to look like...that is what I want to hear.

And now we hear from Richard Rogerson, an expert in labor economics and how indivisibilities influence employment decisions, he is one of the people you want to have commenting on this. But the presentation itself did not put so much extra meat on the table.

Have they looked at variations between neighboring states? Some states must have different approaches towards welfare implementation (work requirements for unemployment, etc).

Along the same lines, I would be curious if Canada saw much the same trends (Canada is, IIUC, a great comparison for the US, because we're very similar culturally and demographically but under different governmental regimes).

Canada is, IIUC, a great comparison for the US.
And we have the South and they have Quebec. These are very analogous on many planes.

Canada is a terrible comparison. It has a much smaller population concentrated in a small area.

This piece about East Africa still being in a Malthusian trap seems too pessimistic to me:
http://arxiv.org/abs/1503.08441

As I currently reside in East Africa I would have to agree it is far too pessimistic. Where lack of food exists, if at all in my experience in Northern Uganda, it is due to lack of a developed market far more than the lack of food. The land is incredibly fertile here yet there is virtually no access to market which means the whole region suffers from lack of investment. Investment that won't be coming soon due to government restrictions.

Rogerson speaks quickly.

Is there a consensus decomposition on declining female labor force participation? If not, maybe we still need to be agnostic. (My view, not attributed to anyone else.)

And a lot of potential causes are "spiky," but the trends themselves seem to be fairly smooth, or so it seems to my eyes, at least once I put my glasses on. Welfare reform, as a potential cause, may run into this problem.

What's the best lunch place at Logan Airport? Is it still Legal Sea Foods? At move 31, So's position appears to be very solid, likely a draw.

Predictions about the labor force participation rate also have to be tested against the data on employment/unemployment rates.

Jasper White's Summer Shack, if still there, is far better than Legal!

Very good comments from Rogerson, and more people should speak at his speed.

“Workers between 16 and 24 years of age constitute the demographic group that has experienced one of the most substantial declines in labor force participation."

I wonder if this isn't the real link with welfare reform. Rather than collecting welfare, people now work low-paying jobs. This obviously doesn't explain everything, but it might explain this aspect of the decline.

To collect welfare, one must work a low wage job, that is low wage because its for kids gaining work experience before they leave school, even if you are 40, and especially if you are 50.

Who is going to hire you if you are 50 and invest in you and move you up the wage scale when you will be dead before you get the experience to be assistant manager?

Why should anyone hire you if it will take you 20+ years to learn enough to be an assistant manager?

So far the authors haven't shown that their novel hypothesis explains other features of the data, including changes in job finding rates, those are my views at least.

"Is there a consensus decomposition on declining female labor force participation?"

This article offers some evidence: http://www.thefiscaltimes.com/Columns/2013/04/17/Why-Women-Are-Leaving-the-Workforce-in-Record-Numbers.

This comment is an excellent object lesson in just how difficult it is to explain *any* labor market phenomena.

And now Bob Hall takes the floor...of course in previous writings he has argued against the view that work disincentives are a major cause of lower lfp for lower earners, see this link:
http://marginalrevolution.com/marginalrevolution/2015/01/who-is-moving-out-of-the-u-s-labor-force.html

The general Disutility of Labor hardly seems an economic puzzlement in human nature.

So, in my view, Hall either has to fold on his previous views, or disagree with the authors pretty fundamentally..we'll see which way it goes!

Which would you expect?

I'll say only that what I expect has come to pass.

There is a recurring theme of how much a given hypothesis about labor markets can explain all of the available data.
Now the Kremlin is saying they won't be sending any short-term cash to Greece.
Are there ways to adjust the data so that unemployment rates and lfp rates more or less move together? What kind of adjustment might that be? What can we infer from the nature of such an adjustment? Might that help us derive underlying restrictions on shocks to labor markets? I've wondered about those questions for a while, and now I wonder whether Hall will bring them up.

Excellent comments from Hall, as you would expect.

Hall has a very, very good grasp on labor market data, flows, duration issues, much more.

This session is really a superb testament to the NBER as an institution, and the scientific dedication it inspires in its affiliates.

And now it is time for the authors to respond...

didn't read the post but boy has the quality of comments surged up today

+1 I also like the fact that Tyler is a speed listener as well.

Thanks, HL...but I was really trying to spur on more comments. I enjoy reading comments.

My personal view is that the thesis of the authors is not holding up.
Wesley So, however, has held the draw against Kramnik, congratulations Wesley, a great bounce-back from some recent troubles. Greece does not seem to be holding the draw against the markets. I'll be checking the Asian markets at 8 p.m. Sunday evening.
And now discussion shifts to the floor...

Along what lines does the Canadian story run?

I would posit that the 16-24 labor market indicates the state of the economy broadly, and is the first to respond to any policy changes. "When we were kids we all had jobs" indicated the ease of getting one, and the ease that our parents could get extra cash to buy us a car or whatever.

Canada? Depends what you live. I grew up in Quebec and it was hard to get any job, many young people moved away, those that didn't had family support, serious gumption to create something, connections, or criminal ambitions (not as rare as one would like. In BC pre liberalization in some states, pot growing and export was the largest industry in the province employing many). Alberta had jobs for anyone, lots of young people relocated, or even commuted.

An anecdote. Two federal elections ago a candidate in the riding where I lined in Quebec for some reason was on the news bashing Alberta as the enemy at the gates. The media liked it coming from the urban left, but it didn't work. Many residents have cousins nephews or children working in Alberta, or even commuting.

Outside of Toronto which has a construction boom, the story is people holding down three part time jobs.

In most provinces welfare is a pittance, unemployment is hard to qualify for and of short duration. There is a natural experiment to study when unemployment insurance and welfare, housing policy were reformed in the 90's in Canada.

They held court, winning both games at the Bell Centre. PK Subban incident still rankles the Senators.

Now the story shifts to Ottawa. Can the Hamburgler bounce back?

Now the issue of young workers, and the difficulty of explaining their decline in labor force participation, is coming up. Can I be nostalgic for a moment: "When I was a kid, we all had jobs!" For the well-off, this has been replaced by homework and sometimes sports, overall a loss in my view.

Agreed. My 17 yrl old son has never had a job, but Lacrosse and school work still keeps him very busy.

Kids are different these days, as they always were.

I understand the personal and cultural/social benefits that arise when teenagers work. However, there are also many benefits from studying (obviously) and participating in competitive sports. In my opinion, if the sports programs are done right, the participants will gain more personal benefits --- lifelong benefits, not just ephemeral ones of popularity, etc. --- than they will gain from the types of jobs that teenagers typically take. Granted, some would argue that there are external social/cultural benefits when well-off teenagers work "menial" jobs.

Besides, when your kids don't work, you don't need to taxi them around now that jobs are so far away from where you live that going to school requires school buses and going to work requires a car because public transit is too expensive, while cars are free.

cars are free except insurance, gas, maintenance, spare parts, driver time, taxes and, of course, the cars themselves.

I wonder if there are any studies on trends in teenage allowances? It seems the farther back you go, the more the deal was room and board only, anything else you worked for.

I'm not pining for the old days, though. Honestly, I think exposure to low-paid work can easily be more harmful than helpful.

Session over!

The Rockets don't have much of a chance. The Clips, on the other hand, have one of the top 3 point differentials (margin of victory) in the league. Doubt Chris Paul at your peril.

What was the gist of Rogerson and Hall's comments? I'm curious

Regarding non-participation over time and two person households:

I would be interested in seeing a time series on the cost of daycare over the same time period. If wages are low and remained low, and the cost of daycare is high and rising, it may be rational to stay at home, leading to a lower labor force participation rate. I would be interested in looking at participation rates in states with low cost of daycare, or states with pre-kindergarten daycare programs and support versus those that have minimal support.

The paper did not look at the cost of going to work for a two member household over time, nor did it impute income for stay at home moms.

You could also break out the data for the 17-24 year old group on whether a two person adult household has a child or not. I am willing to bet that two person adult households with children changed in labor force participation over time, while one person adult with child increased.

My guess for every second income parent to drop out of the workforce with EITC there is a single parent who joins the workforce with EITC and these nearly cancel each other out. Now across society this hits me as a good choice because the 2nd parent income dropping is probably either having another child (thus the second income is not worth all the day care expense) or focusing on the family.

In reality, the big drop in the US work force is the young 16 - 24 year olds that are focusing on schooling and building resumes and not serving working a low wage position. (Also with less driving they don't need as much income.) At this point I don't know if this is a good trade off for society but it is happening.

Nada Eissa's work on the marriage penalty was finding these EITC effects back in the late 1990s. Here's a column I wrote at the time: http://vpostrel.com/articles/tax-system-discourages-married-women-from-working Here's the NBER link to a 1996 paper: http://www.nber.org/papers/w6856

The marriage penalty applies to the lesser-earning spouse, regardless of gender. In our family that would be me. The only type of work that makes sense for me tax-wise is self-employment, because of the greater deductibility of work-related activities.

Interesting post.

The connection to Clinton welfare reforms seems weak. The drop in youth participation is much easier explained by rising affluence and "average is over" - less incentive for youths to take low-end jobs, more incentive to go to and stay in school. Also I believe the drop in participation in older age groups is more among men than women. The stories suggested of married couples better able to keep the wife at home thanks to EITC or unemployables pushed into disability by loss of welfare seem more like anecdotes than statistically important trends. I'm sure disability and the wars of the 90s and 00s reduced participation, but I don't see what that has to do with the Clinton welfare reforms.

Easier to borrow money for school than try to work and study.

Quite common to see couples where kids are grown, woman working in healthcare with benefits, man in skilled trade or similar working seasonally or project.

Agree. Having a job makes you seem like a loser these days unless it is a great job. The glorification of success over the past 20 years has caused a lot of average people to quit trying.

All of America is a bit like Hollywood now.

Made me think of this article,
"On Jobs and ‘Jobs’"

http://goo.gl/RQhcXR

Wasn't there a control study that involved tenure and the elderly? Or was that Judges..?

The most obvious reason that the labor force has declined is that having a job is no longer a good way to get laid.

Has anyone at the conference presented that thesis?

The growth of the bureaucratic state and an increasing regulatory burden mean that the labor participation rate is falling because workers aren't in the ordinary labor pool. Much labor is paid in cash and off the books.

+1 I do not know how a big a factor this is but many of those guys out of the taxed labor force are working.

$16/hour with no benefits is the new $35k salary with full benefits.

Is immigration's impact mentioned?

Not to play Steve Sailer's role here but come on...

You've all forgotten Occam's Razor, people.

When you've had a Democrat President for six years, and catastrophically high unemployment for all that time, and those numbers are deceptively low due horrific labor force participation.... the absolute best way to get media attention is to claim "a strong decline in the desire to work."

I've been saying this for at least 10 years -- the utility of leisure has never been higher, and the tradeoffs for marginal work have never been worse.

Also. part of the effect of really high living standards is that people want to enjoy high living standards all the time, even at work. American Millennials are nearly useless for a lot of the really hard, dirty jobs.

None of these are bad things! Enjoy the capitalist utopia. Rejoice that our children will have it better yet.

And be glad the one percenters are doing most of the work.

If those jobs paid a lot more -- or if people thought they would be entry level jobs leading to somewhere else -- we'd probably have a lot more young people willing to do those jobs.

Look at how the people in coal mining districts cling to the coal. These jobs are known destroyers of lives and health yet people are desperate to work for a good wage.

Good point about coal though but how does that balance out against the other factors.

While annual coal mining deaths numbered more than 1,000 a year in the early part of the 20th century, they decreased to an average of about 451 annual fatalities in the 1950s, and to 141 in the 1970s. From 2006-2010, the yearly average number of fatalities in coal mining decreased to 35. In 2009, there were 18 recorded coal mining deaths, a record low number. Sadly, coal mining fatalities dramatically increased to 48 in 2010, with the tragedy at the Upper Big Branch Mine claiming 29 lives in addition to the 19 other coal miners killed that year. In 2011, 21 coal miners were killed in accidents. 2012 saw 19 coal miners killed in accidents.

The safety gains in metal and nonmetal mining have also been impressive. In the 1930s, an average of 233 miners died per year in the non-coal mining sector, compared to an average of 24 fatalities per year from 2006-2010. In 2009, mining fatalities in this sector reached a then-record low of 17. 2010 saw 23 metal and nonmetal miners killed in accidents. Record low fatalities of 16 in 2011 and 16 in 2012 show the continuing gains in metal and nonmetal mine safety.

http://www.msha.gov/MSHAINFO/FactSheets/MSHAFCT2.HTM

People typically underestimate these sorts of things.

Nice try.

They [1%] don't.

Two full-time minimum wage earners are at the 38th percentile of household income ($30,160). Two well-paid, well-educated professionals living in a major metropolitan area are at about the 94th percentile ($200,000) - along with every doctor's family. It's hard to be poor in America, but some people are really good at it.

Because consumers capture the vast majority of value created (as they must in a free-market system), the 1% are the main reason living standards rise.

People generally don't understand what income is, they usually see it as something to spend when it's actually a tiny siphon of value being created somewhere else. Of course value to incomen can never be a perfect correlation, but aside from rentseeking and taxation the effect of a free market is generally to match the one to the other.

+1
Democrats incessantly complain about the loss of manufacturing but I read a story a couple of years ago that said manufacturing jobs are hard to fill. Who wants to work a repetitive job, sometimes lifting heavy things in hot factory, not most people.

Also good earners can support their 1 to 3 children easily. I bet the Amish still work at very high rates and still do hard work jobs.

I have heard that about manufacturing too.

But then I have heard that many industries "can't find the people they need" yet we have seen that wages for most have continued to stay the same or even decrease. In addition companies have cut way back on training.

How many companies who "can't find the people they need" paying just about the same thing they did 10 or 15 years ago and significantly upped their "must-have" lists for their jobs? Quite a few, I think.

On the other hand I think we'd see quite a few people come out for $20 an hour full time factory jobs with benefits.

I don't think we can separate low wages and lousy and/or physically taxing working conditions. Most Americans do have a sense that they should not be expected to work in jobs that both wear you down and wear you out young and pay next to nothing. They want to be compensated for their hard work, possible future disabilties and inconvenience. Who can blame them? i want them to be compensated fairly too.

"fairly"

You want to be compensated "fairly".

You want to be paid more than anyone with the capability to pay you thinks is "fair".

How do you know that?

First of all, who's trying to be "fair" these days, as a lower percentage of money goes to wages.

Money does not have to funnel up. Money does not have to shift from labor to capital.

America's stock market doesn't have to do better than ever while many Americans are stuck in limbo or seeing their quality of life decrease.

You may want to find & reread that story. I have heard people in manufacturing say that the low skill jobs have a massive surplus of applicants. The hard to fill jobs are limited to the skilled trades positions (i.e. tool & die maker or machine maintenance).

"Possibly" and "conjecture" appear often in this paper. I think Cowen's interpretation is the correct one: it's a confluence of factors that have affected labor force participation, not one factor. There's not always a silver bullet to explain phenomena. Consider the decline in labor force participation among teens: today's America is definitely more affluent than the America of the 1950s during which I grew up, so many teens today don't need to work. Or this: teens, by definition, can't move from place to place in order to find work, so if their families reside in a place of high unemployment and few opportunities (Detroit, Buffalo, or even within a pocket of a region that is otherwise prosperous such as sections of LA and NYC), they are unlikely to participate. All too often researchers identify a "cause" and then go find data to support it. Why? Because there's a constituency for it - on the left (pro government social programs) as well as on the right (those opposed). That's one problem with micro: many little things can affect a few big things. It's called micro for a reason. Unfortunately, views about government, as either the boogeyman or the savior, taint much research. An example: the research/data that supports the conclusion that cutting off unemployment benefits at the end of 2013 "caused" the large increase in employment in 2014, research that had one glaring omission, job openings (the number of which was on the rise but really took off in 2014). A glaring omission that went unnoticed by those who agreed with the conclusion.

In discussing the decline in youth participation rates, did the authors control for the states where the minimum drop-out age for high school was raised from 16 to 18? I seem to remember a fair number of states doing that between 1990 and 2005. For that matter, would an increase in financial aid for those going to post-secondary school incentivize staying out of the workforce?(This could be "knowledge is power, and I can make more money with a degree than without," but it might also be "I can get money for going to school, and I don't have to even pass my classes or complete my semester.") (NB financial aid reforms in the last few years may have eliminated that last explanation.)

It sure seems like my classmates who had their parents support them during unpaid summer internships have better outcomes than me, despite my enriching experience restocking supermarket shelves every summer

You should have selected better parents.

Is it possible we're over-complicating the issue? We have weakened labor protections in all sorts of ways, compensation has stagnated (I'd say declined, what with contributions to retirement and healthcare, but I don't have numbers). Why is it such a surprise that fewer buyers are attracted to a declining product?

GASP!
How horrible!
This is going to decrease Our Most Sacred GDP and Our Most Holy Corporate Profits!

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The desire to work is still on, it's just altered during the recent years. The situation is not so dramatic considering the following reports. According to Heidi Shierholz with research assistance from Kathryn Edwards and Andrew Green (see full report here: http://www.epi.org/publication/jobs_picture_20100205/ )the picture of unemployment aggravated seriously during the recent years, not only because of the recession, but also because of some very interesting sideways factors, such as:
1) The changes in working environment and alteration of employees’ attitude to job security issue.
2) The modification in the internal policies of the companies caused by the necessities of lowering costs and increasing productiveness with the help of novel technologies.
Generally, it means, that the loss of jobs in 2014 is not caused by financial difficulties, but by the upgrades in many spheres which give up on manual labor and shift to machines. Another point, which is rather positive, is the growth of confidence of the employees themselves. Today, people realize it’s much easier to requalify, it’s possible to be more flexible with using job opportunities and shifting within different domains or opting against employment and choosing freelancing. This is another reason why more employees lose their status benevolently and still can keep their financial security.

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