United States

Why a strong jobs market may force entitlement reforms

THE REAL ECONOMY  | 

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The recovery in the labor market has accelerated during the past two years with the creation of 5.76 million jobs, or about 47 percent of the 12.2 million jobs created since the end of the Great Recession. During that time, the unemployment rate has dropped to 4.9 percent from 6.6 percent and the number of unemployed people per job opening has fallen to a cyclical low of 1.4 people for every open job. However impressive that improvement may be, it is partially overshadowed by a decline in the labor-force participation rate, which fell to a cyclical low of 62.4 percent in September last year, and an employment-to-population ratio of 59.5 percent.

MIDDLE MARKET INSIGHT: The rising number of individuals not in the workforce is resulting in a tighter labor market and pushing up labor costs, particularly for middle market firms.

The number of people not in the labor force reached a historical high of 87.4 million at the end of 2014 (the last revised data point), up from 15.9 million a decade earlier. While the bulk of that increase is due to demographic forces at both ends of the age spectrum, the number of individuals who are not in the labor force due to being ill or disabled has increased noticeably, which carries with it distinct policy implications with respect to the solvency of the Social Security Disability Insurance (SSDI) program that will have to be addressed either in this business cycle or, at the very least, in the next.

The 18.1 percent increase in the number of people not in the workforce is largely explained by the early retirement of some portion of baby boomers and the choice of millennials to remain in school and pursue undergraduate and graduate degrees. Of those aged 16 years or older, there has been a 30 percent increase in the general student population, which reached 16.01 million at the end of 2014. At the other end of the demographic spectrum, the number of retirees increased 19 percent to 38.35 million. Together, these two groups account for 62.1 percent of people not in the workforce, up from 60 percent a decade earlier. With more than 10,000 baby boomers retiring per day, it’s highly probable there won’t be a significant improvement in the labor-force participation rate anytime soon.

In addition, as one might expect given the retirement of the boomers and the arrival of millennials at the other end of the age spectrum, there has been a modest increase in those not working due to home responsibilities. While the increase among men aged 25 to 54 has been negligible, there has been a 1.5 percent increase in women among that cohort who appear to be shouldering the burden of caring for the young, the elderly or both.

What is far more troubling is the 3.9 million, or 24 percent, increase in those not working due to being ill or disabled. Among the 25- to 34-year-old cohort, those on disability increased by 14 percent overall and account for a full one-quarter of those not in the workforce due to being ill or disabled. Even more startling is the 39 percent increase of those aged 55 to 64 who are not in the labor force due to disability or being ill. Broken down by gender during the past decade, women not in the workforce due to that reason increased 16 percent while men rose 12 percent. Together, those not in the labor force for those reasons between the ages of 25 and 64 account for a full 12.6 percent of the working-age population.

MIDDLE MARKET INSIGHT: With the labor market tightening, and middle market firms telling us in our Middle Market Leadership Council survey about the increased difficulty in finding skilled individuals to hire, entitlement reforms would support overall growth and productivity and possibly ease hiring pressures.

Also notable is the number of people not working for other reasons, or those who just cannot find work. That cohort has increased by 23 percent during the past 10 years and stood at 3.05 million at the end of 2014.

The stark increase in the number of people not working due to being disabled will likely result in a federal review of eligibility requirements to qualify for the SSDI program. Academic work completed by MIT professor David Autor persuasively makes the case that, since the Congressional Reforms of 1984, the SSDI program essentially functions, at the margin, as a social safety net for individuals whose primary barriers to gainful employment are weak skills and a resulting lack of job opportunities rather than health limitations. Regardless, these barriers are neither good policy nor fair to the truly disabled.

Available policy options to address this problem include cutting taxes on income, reforms to make SSDI and other forms of assistance more efficient, increasing the frequency of federal assessments of program recipients’ ability to work and imposing total time limits and benefit caps toward increasing incentives to work. With the labor market tightening, and middle market firms telling us in our Middle Market Leadership Council survey about the increased difficulty in finding individuals to work, such reforms would support overall growth, productivity and, on the margin, ease pressures on federal spending.

 

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