Wednesday, February 05, 2014

Labor Participation Rate and Bad Cancer Cures

One might be sanguine about our economy if you look at the unemployment rate: It has gone from about 10% back in 2010 steadily downward to 7.5% now. If you look at the labor force participation rate, the story takes on a different hue: We have steadily dropped from around 66% between 2003-2008 to about 63% now. Back in 2006, 66% of the people wanted to work, there was 5% unemployment and so 62.7% were actually working. Now, we have 7.5% unemployment and only 63% participating, so that leaves 58.275% working. If we calculated unemployment using the former participation rate,we would get:

(1-(58.275/66)) X 100 = 11.7%

Some might say that decreased labor participation is good because it gives us a better unemployment rate. I will show why I disagree below.

Unemployment rate: From BLS

Labor force participation rate: From BLS

The recent CBO report on the impact of "Obamacare" says:

CBO estimates that the ACA [Affordable Care Act] will reduce the total number of hours worked, on net, by about 1.5 percent to 2.0 percent during the period from 2017 to 2024, almost entirely because workers will choose to supply less labor—given the new taxes and other incentives they will face and the financial benefits some will receive.
(People like Greg Mankiw (and many others) saw this coming from a long-way off.)

This has been greeted by some as a good thing. Certainly it is possible that some individuals will benefit: Let's say there is a guy who hates his job, doesn't need the money, but did need the health insurance. Let's further assume that now he can get his coverage for free or so cheaply that he could afford it easily. Okay, he is gaining from the new law. But what about society? We lose in two ways: 1. He will no longer provide the valuable work he had been doing. 2. We as a society are now paying for what he had previously provided for himself. Bear in mind that the above was a best-case-scenario. He could have been forced to quit because his employer had cut his pay to provide added benefits due to mandates or because of higher taxes or any number of reasons that leave him worse-off now.

The whole idea of society being better off with fewer people working reminds me of good and bad ways to decrease mortality from cancer.

A good way would be prevention: Get people to stop smoking and lung cancer rates will go down. Another good way is earlier detection and better treatments. But here is a bad way of reducing the rate of cancer deaths to zero: Execute anyone who is diagnosed with cancer. It is a ridiculous idea and yet one cannot deny that it eliminates death from cancer. The problem with it is that it doesn't leave anyone better off than they were before. Similarly, organizing our economy such that fewer people want to work deprives us of productive activities.

All of this leaves aside the non-economic value of work: This was well summed-up in a comment to this post over at MARGINALREVOLUTION: How happy should we be about ACA supply-side responses to work less?

Turkey Vulture February 5, 2014 at 12:06 pm
I really dislike working. I don’t like being tied down, and want to pursue other activities. But at points in my life when I haven’t worked, or have worked minimally, I have tended to just waste time doing nothing of use. And I want to do things, accomplish things, I just don’t. I am lazy, and especially so when I have no immediate need to do anything. This lowers my life satisfaction. But still, even knowing this, if I have a way to get by without having to work, I will be tempted to take it, and probably lose the good habits a regular job can bring.

I think most people are like this, which is why even though I will never pray at the alter of the protestant work ethic, I think that programs that encourage idleness can lead people into a rut from which they won’t have the wherewithal to escape. But hey, maybe everyone else is more of a go-getter than me, and I’m completely off base.

I think Turkey Vulture is correct--and far more honest than most people are about themselves.