With Job Creation Up, Workers Still Choose to Stay Home

The good news is that the economy is creating more jobs than ever. Just consider—257,000 more jobs in January, 329,000 in December, and 423,000 in November. The bad news is that the labor force participation rate—the percentage of people who are employed or who are looking for work—has barely moved, from 63 percent in January 2014 to 62.9 percent in January 2015.  

These are levels equivalent to the late 1970s, before the movement of women into the labor force. This is worrying because more people at work means a stronger economy.

After most recessions, people gradually go back into the labor force as jobs become available.  This time is different.  When extended unemployment benefits ended in January 2014, many people, myself included, thought that labor force participation rates would start to rise. It hasn’t yet happened.

University of Chicago professor Casey Mulligan, in his book Side Effects: The Economic Consequences of the Health Reform, suggests that the Affordable Care Act has discouraged people from working. When you earn between 133 percent and 400 percent of the poverty line, which translates into between $32,250 and $97,000 for a family of four, every extra dollar you earn means fewer premium subsidies. 

Mulligan suggests that under the Affordable Care Act, up to 11 million people can gain from not working. One woman I spoke to was happy to have earned less in 2014 than in 2013, because the cost of her health insurance for her and her husband declined by more than her earnings. There are many more like her.

This new disincentive to work has come on the heels of the greatest expansion of unemployment benefits in modern history, from 26 weeks of benefits to 99 weeks.  The number of people on food stamps has risen from 26.3 million in 2007 to 46.5 million in 2014.  The number on workers and dependents on disability insurance has gone from 8.9 million to 10.9 million over the same period.  Economics21 contributor Charles Blahous wrote, “the rise reflects causes ranging from a liberalization of eligibility criteria in 1984, to a surge in disability benefit applications when unemployment rose during the Great Recession.”

At the same time, the Affordable Care Act has made it harder for employers to hire workers.  If employers with over 49 full-time-equivalent employees do not offer the right kind of health insurance, they owe a nondeductible fine of $2,000 per full-time worker per year.  So moving from 49 to 50 workers can cost $40,000 a year, as the first 30 are exempt.  Employers become “49ers,” limited to 49 workers.

Employers also have an incentive to make their workers into “29ers,” those who work only 29 hours a week.  No penalty is owed on those who work fewer than 30 hours.  Their incentive is to hire as few workers as practical, and, when possible, hire part-timers.

When people are better off staying home, they don’t go out to work.  When employers are better off with fewer workers, they don’t hire.  That is how America has ended up with 1970s levels of labor force participation and 1970s growth rates.