Donald Boudreaux: What does decline in labor-force participation mean?

Imagine that overnight every American’s wealth doubles. From Jeff Bezos to the poorest indigent, imagine that each American today can afford to consume twice as many goods and services as that person could afford to consume yesterday.

Making accurate specific predictions about what changes in people’s behavior we’d observe is impossible. Who knows if the number of SUVs purchased relative to the number of sports cars purchased would rise or fall? But we can safely make this general prediction: Nearly every American would consume more goods and services.

And because leisure is a good — that is, something valuable — a doubling of all Americans’ incomes would increase the amount of leisure that we consume. More of us would stay in school longer, retire early and refuse to work weekends.

This trite mental experiment suggests a not-so-trite angle on this question: What explains the decline in Americans’ labor-force participation?

The U.S. labor-force-participation rate is the percentage of non-institutionalized working-age Americans who are either employed or actively seeking employment. In the U.S., this rate for all workers is today four percentage points lower than it was when it hit its all-time high in early 2000. Yet it remains higher than it was at any time before the late 1970s.

If we look only at men, however, the trend is different and seemingly much worse. Men’s labor-force-participation rate hit its post-World War II peak of 86.6 in August 1949 and has fallen rather steadily ever since. Today it’s 69.1.

People wishing to tell troubling tales point to these data — which are indeed consistent with troubles.

But not so fast.

Because leisure is a good, as people grow wealthier they consume more of it. Well, Americans today are much wealthier than were Americans of 70 years ago, and even of just 20 years ago. Surely, then, some part of this decline in labor-force participation is caused not by the economy’s shortcomings but by its successes.

Indeed, the very length and timing of the 70-year-long decline in men’s labor-force participation strongly suggests that much of this decline reflects a rise in prosperity rather than in problems.

In the decades immediately after WWII ordinary Americans famously became wealthier. The U.S. economy boomed, despite the fact that Americans back then did relatively little trading with non-Americans. Yet men’s labor-force participation rates nevertheless fell steadily as the economy motored merrily along. In January 1950 men participated in the labor force at a rate of 86.2; 10 years later this figure was 83.6. And 10 years after that — in January 1970 — this rate had fallen further, to 79.9.

The most plausible explanation for this post-war decline in men’s labor-force participation is that Americans’ greater wealth both allowed more American males to attend college (and, increasingly, even graduate school) rather than start full-time work at 18, as well as allowed more American males to retire early.

In addition, America’s increasing wealth renders government more willing and able to enact programs that allow working-age adults to remain out of the labor force temporarily or (as with some disability payments through Social Security) permanently. Whatever you think of such programs, their reflection of America’s increasing wealth should not be missed.

I’ve no doubt that some of the decline in labor-force participation reflects problems with the economy and with government policy. But it’s a mistake to conclude that all, or even most, of it does.