By William Freeland
Oklahoma’s labor force participation rate sits at 60.5 percent as of August 2016. By way of comparison, the overall U.S. labor force participation rate is 62.9 percent, while the median labor force participation rate among states is 63.5 percent.
Both in Oklahoma and nationally, the labor force participation rate has modestly improved since a steep decline caused by the Great Recession, but that recovery from a cyclical decline has likely peaked. That leaves a much larger, persistent decade-and-a-half structural decline—structural defined as economic effects driven by deep economic fundamentals and not those driven by temporary, business-cycle factors.
This is a grave problem necessitating public policy reform on multiple fronts.
The labor force participation (LFP) rate measures the percent of the adult, civilian, non-institutional population that is either employed or is unemployed and actively looking for work. Thus, those in college, those retired, and those otherwise not looking for work—those perhaps discouraged from a fruitless job search or those on social assistance, for example—comprise the cohort not in the labor force.
LFP has a crucial bearing on economic health. This understanding can be traced all the way back to Adam Smith, who noted that “specialization is limited to the extent of the market,” i.e., to the number of workers contributing to the capitalist engine of production, which is a key driver of growing production. A society can only consume what it produces; thus more citizens contributing to productive endeavors allows us all to consume more products, better products, and lower-priced products.
Looking at annual LFP in Oklahoma over time, we can see in the nearby graphic a precipitous decline over the last decade and a half, with LFP dropping from 64.6 percent in 2002 to 61.9 percent in 2015. Returning to an LFP of 64.0 percent would mean adding 105,341 individuals to the labor force.
Fixing Structural Issues: Taxes, Regulation, Welfare, Criminal Justice
Observers of downward-trending LFP should not necessarily ascribe laziness to Americans exiting the labor force. A stagnant, slow-growth economy exhibiting low dynamism tends to lead to lower LFP. Crucially, economic damage from misguided public policy—such as high and inefficient taxes, or complex and burdensome regulation—depresses economic opportunity and discourages potential workers from engaging in the economy productively.
Looking at the magnitude of these public policy problems, consider first taxes. Researchers at the nonpartisan Tax Foundation compare what Americans pay in consumer essentials—housing, clothing, and food—with the the $4.9 trillion they pay in federal, state, and local taxes. They conclude that America will spend more on taxes in 2016 than it will on food, clothing, and housing combined.
Though taxes are the clear and explicit cost of government, regulatory policy also has real economic costs that impact the U.S. economy. On the federal level, two recent studies have attempted to quantify the cost of regulatory policy. The Competitive Enterprise Institute finds cumulative costs of federal regulatory policy totaling $1.89 trillion, which is $14,842 per household. The Mercatus Center’s federal regulatory cost study found that regulatory growth since 1980 has made the economy $4 trillion smaller in aggregate. And these figures do not include the costs of state and local regulatory policy.
When considering declining LFP, one must also look at the incentives created by other public policies. Most notable to LFP, it’s worth considering the impact of transfer payments, such as social assistance. At the highest level, studies have analyzed the economic impact of transfer payments and have established a research consensus that they depress economic growth by disincentivizing production by providing individuals the opportunity to consume absent work.
Additionally, social assistance programs entail “implicit marginal tax rates” and “welfare cliff” effects that incentivize individuals’ leaving the labor force and avoiding employment advancement opportunities. Consider the Affordable Care Act, which, according to the Congressional Budget Office, may lead to as many as 2.5 million fewer Americans employed, largely by allowing individuals to receive healthcare without working.
Again, individuals responding to these welfare cliffs are behaving rationally (from an economic perspective) in response to the incentives created by public policy.
Consider also criminal justice. In his new book Men Without Work, Nicholas Eberstadt writes: “A single variable—having a criminal record—is a key missing piece in explaining why work rates and LFPRs [labor-force participation rates] have collapsed much more dramatically in America than other affluent Western societies over the past two generations. This single variable also helps explain why the collapse has been so much greater for American men than women and why it has been so much more dramatic for African-American men and men with low educational attainment than for other prime-age men in the United States.”
Getting work with a criminal record is exceedingly difficult. Those individuals are likely to become discouraged by a difficult job search and exit the labor market, perhaps permanently. Moreover, communities strongly affected by mass incarceration likely see the effect compound, as family conditions affect children, norms of achievement and belief in the American Dream decay, and business formations and success in these communities are deeply damaged.
In sum, policymakers in Oklahoma and nationally should target LFP as a top priority. Though policymakers can’t control demographics or global economic trends, they can provide an enormous improvement to LFP by reforming public policy.
William Freeland is an independent public policy analyst, research economist, and data scientist with a decade of experience in public policy research and advocacy. He has worked as a research analyst and economist for the American Legislative Exchange Council (ALEC), as an economist at the Tax Foundation, and as a member of the research faculty at the George Mason University Law and Economics Center.