The Wages of Unemployment
From the mid-17th century to the late 20th century, the American economy grew roughly 3.5% a year. That growth rate has since declined significantly. When the final figures are in for 2012, the annual rate of real output growth for the first dozen years of this century is likely to be about 1.81%.
What accounts for the slowdown? An important part of the answer is simple: Americans aren't working as much today. And this trend reflects more than the recession and sluggish economy of the past few years.
The national income accounts suggest that about 70% of U.S. output is attributable to the labor of human beings. Yet there has been a decline in the proportion of working-age Americans who are employed.
In recent decades there was a steady rise in the employment-to-population ratio: For every 100 working-age Americans, there were eight more workers in 2000 than in 1960. The increase entirely reflects higher female participation in the labor force. Yet in the years since 2000, more than two-thirds of that increase in working-age population employed was erased.
The decline matters more than you may suppose. 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. The annual growth rate of GDP would be 2.2%, not 1.81%. The retreat from working, in short, has had a real impact.
Why are Americans working less? While there are a number of factors, the phenomenon is due mainly to a variety of public policies that have reduced the incentives to be employed. These policies include:
• Food stamps. Above all else, people work to eat. If the government provides food, then the imperative to work is severely reduced. Since the food-stamp program's beginning in the 1960s, it has grown considerably, but especially so in the 21st century: There are over 30 million more Americans receiving food stamps today than in 2000.
The sharp rise in food-stamp beneficiaries predated the financial crisis of 2008: From 2000 to 2007, the number of beneficiaries rose from 17.1 million to 26.3 million, according to the Department of Agriculture. That number has leaped to 47.5 million in October 2012. The average benefit per person jumped in 2009 from $102 to $125 per month.
To be sure, we would expect the number of people on food stamps to increase with rising unemployment, poverty and falling incomes in late 2008 extending into 2009 and perhaps even into 2010 (even though the recession was officially over in late 2009). But more is going on here.
Compare 2010 with October 2012, the last month for which food-stamp data have been reported. The unemployment rate fell to 7.8% from 9.6%, and real GDP was rising steadily if not vigorously. Food-stamp usage should have peaked and probably even begun to decline. Yet the number of recipients rose by 7,223,000. In a period of falling unemployment and rising output, the number of food-stamp recipients grew nearly 10,000 a day. Congress should find out why.
• Social Security disability payments. The health of Americans has improved, and the decline in the number of relatively dangerous industrial production and mining jobs should have led to a smaller proportion of Americans unable to work because of disability. Yet the opposite is the case.
Barely three million Americans received work-related disability checks from Social Security in 1990, a number that had changed only modestly in the preceding decade or two. Since then, the number of people drawing disability checks has soared, passing five million by 2000, 6.5 million by 2005, and rising to nearly 8.6 million today. In a series of papers, David Autor of MIT has shown that the disability program is ineffective, inefficient, and growing at an unsustainable rate. And news media have reported cases of rampant fraud.
• Pell grants. Paying people to go to college instead of to work is traditionally justified on the grounds that higher education builds "human capital" that is vital for the country's economic future. But a study Christopher Denhart, Jonathan Robe and I did for the Center for College Affordability and Productivity (that will be released soon) shows that nearly half of four-year college graduates today work in jobs that the Labor Department has determined do not require a college degree. For example, over one million "retail sales persons" and 115,000 "janitors and cleaners" are college graduates.
In 2000, fewer than 3.9 million young men and women received Pell Grant awards to attend college. The number rose one-third, to 5.2 million by 2005, and increased a million more by 2008. In the next three years, however, the number grew over 50%, to an estimated 9.7 million. That is nearly six million more than a decade earlier. The result is fewer people in the work force. Meanwhile the mismatch grows between the number of college graduates and the jobs that require a college education.
• Extended unemployment benefits. Since the 1930s, the unemployment-insurance system has been designed to lend a short-term, temporary helping hand to folks losing their jobs, allowing them some breathing room to look for new positions. Yet the traditional 26-week benefit has been continuously extended over the past four years—many persons out of work a year or more are still receiving benefits.
True enough, the economy isn't growing very much. But if you pay people to stay at home, many will do so rather than seek employment or accept jobs where the pay doesn't meet their expectations.
These government programs are not the only players in this game. For example, a more worker-oriented immigration policy in recent decades would have measurably raised the rate of economic growth and increased the employment-to-population ratio. Taxes are part of the story too: Today's higher marginal tax rates on work-related income could well lead to further reductions in work effort by those taxed, as well as to slower economic growth.
Most Americans recognize the need to reduce government spending to rein in the national debt. But there is another reason to cut government spending for specific programs: If more people have less incentive to stay out of the work force, they might seek jobs and help spur economic growth.
Mr. Vedder is professor emeritus of economics at Ohio University, an adjunct scholar at the American Enterprise Institute, and a policy advisor at The Heartland Institute.
[First published at the Wall Street Journal.]