Daniel Sutter: Working for a living

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Americans have traditionally worked hard, logging longer work weeks and taking shorter vacations than Europeans. Yet two changes in the labor market suggest that our work ethic may be dissolving. The changes are ominous because working for a living is the core of our modern prosperity.

The labor force participation rate provides insight on the labor market. A person participates in the labor market if they are employed, or if not employed and actively seeking work. Not everyone of working age wishes to work (e.g., retirees, full time students), so the definition must account for this.

Labor force participation stood at 66% in January 2008 and fell to 63% during the Great Recession. Participation typically falls during recessions as some people who lose their jobs become discouraged and stop looking for work. They then temporarily drop out of the labor market. The unemployment rate is now below 5% and the number of persons employed has increased by 13 million, but the labor force participation rate has remained at 63%. Three percentage points might seem small, but this translates into 8 million persons not in the work force today, which equals the number of Americans currently unemployed.

In addition, the work participation of men aged 25 to 54 has been declining for decades. In 1954, 98% of men in this age group were in the labor force, compared with 88% today. These are the years of peak earnings, when people should be paying off mortgages and saving for retirement.

Economists do not really understand the causes of these labor force participation declines. The President’s Council of Economic Advisors (CEA) could not conclusively identify drivers of the male participation rate decline. The number of Americans on disability has increased sharply in the past 15 years, but the trend predates the rising tide of disability. Generous welfare programs may have diminished work incentives in the 1970s and 1980s, but 1996’s welfare reform significantly tightened eligibility for men. The participation decline may be related to high rates of incarceration; the CEA notes that almost 7% of males aged 25-54 in 2008 had been incarcerated at some point. Time behind bars dramatically impairs employment prospects.

Factors which might drive the post-2008 labor force participation decline would only produce a gradual shift. For example, increased graduate school enrollment and more adult children living with their parents should only slowly adjust the rate. Perhaps the 2008 recession provoked the exit of many who were ready to permanently leave the labor force.

Our economy must produce the goods and services for our high standard of living. A prosperous economy must reward production. The market economy does this through property rights and voluntary exchange. Goods are owned by the producers until sold. Work is the main source of income for most Americans. Because the division of labor today is so extensive, very few people produce something of value by themselves; we just make a small contribution. Nonetheless, the work is valuable enough to earn a living.

This process works so well that today we take it for granted. But humans have been dirt poor throughout most of recorded history. A sustained increase in the average person’s standard of living only began around 1700 with the emergence of the market economy. People’s willingness to work for a living forms the bedrock of prosperity.

Today we are wealthy enough to support people who do not contribute. This can be done through help from family and friends, or assistance can also come from government transfer programs. Much of this reflects our compassion, and we can afford this within limits.

A market economy leaves people free to choose how much they wish to work, that is, to balance their standard of living and quality of life as they choose. A decline in labor force participation consequently is not necessarily bad. But a decline with few clear causes may indicate a dissipating work ethic. Our wealth may undermine the connection between work and consumption which makes prosperity possible.

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Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University and host of Econversations on TrojanVision. The opinions expressed in this column are the author’s and do not necessarily reflect the views of Troy University.

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