The Labor Force Participation Rate Problem
Tue February 4, 2014 3:45 pm

This morning brought some bad news for Obamacare and its supporters, as the Congressional Budget Office put out a new budget and economic outlook for 2014-2014 which projected, among other things, that the 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.”

Or to put it more simply, as many media accounts of the report have done, the nonpartisan number-crunchers at the CBO are saying that the Affordable Care Act will reduce the number of workers in the country by about 2 million people, or cost the country between 2.0 to 2.5 million jobs between 2017 and 2024. The White House, of course, doesn’t like such ways of summarizing the situation, and quickly sent out an irritated statement: “Claims that the Affordable Care Act hurts jobs are simply belied by the facts in the CBO report.”

Technically speaking, the White House has a point. The CBO report says that the reduction in total number of hours worked will be “almost entirely because workers will choose to supply less labor”. In other words, the ACA will constrain the labor supply, rather than the demand for labor. Nonetheless, Republicans are correct to say that the CBO is projecting that the law will cost the country the equivalent of some 2 million full-time jobs. But I’d like to set aside the political score-keeping, and the general debates over the law, and focus on something I found striking about the report.

If you follow national political and economic news, you’ll surely have noticed increasingly frequent references to the country’s labor force participation rate. And because the CBO’s new outlook projects a further decline in America’s labor force participation rate as a result of the Affordable Care Act, you’ll be hearing a lot about this metric this week. And if you don’t find the CBO’s projections about this metric alarming, you should; I’ll explain why, after the jump.

First, let me run through what the “labor force participation rate” is.

As of 2012, according to the Census, there were approximately 314 million people in the United States, and according to the Bureau of Labor Statistics (PDF), the size of the civilian noninstitutional population—aged 16 or older, not in prison, not an active-duty member of the military, etc.–was about 243.3 million.

Of those 243.3 million, roughly 155 million were members of the civilian labor force, meaning that they were either employed or unemployed. The unemployment rate is a ratio of the number of unemployed people compared to the overall size of the labor force. In 2012, there were about 12.5 million unemployed Americans, in a labor force of about 155 million, yielding a national unemployment rate of about 8.1%.

Note that for the purposes of the government record-keepers, people are only categorized as “unemployed” if they’re seeking employment. If they’re not actively looking for a job, they’re not considered part of the labor force. And as of 2012, there were about 88.3 million Americans who were not part of the labor force, even though they were theoretically eligible (that is, even though they were at least 16 years old, not in prison, and so on). The labor force participation rate, then, is the ratio of people in the labor force compared to the civilian noninstitutional population—all the people who could be in the labor force. For 2012 the calculation was 155 million/243.3 million, yielding a labor force participation rate of 63.7%. (For a breakdown of the reasons why people drop out of the labor force, see this publication from the BLS, which is also a PDF.)

This helps explain why millions of Americans feel underwhelmed by the national economic recovery, even though the unemployment rate has dropped from 9.6% in 2010 to 8.1% in 2012. The population grew between 2010 and 2012. So did the size of the labor force, by about 2 million people. But the number of people not in the labor force grew more dramatically, by about 4 million people. The unemployment rate is coming down because a couple million people have simply stopped looking for work.

It isn’t the lowest labor force participation rate the country has ever seen, but it is the lowest rate in a generation—throughout the 1990s, the figure hovered around 67%. And a faltering labor force participation rate is, for most economists, a troubling metric, if not a catastrophic one. It means that economic growth is unlikely, barring significant productivity gains. It complicates going assumptions about revenues and social services: if people aren’t working, they aren’t paying taxes, and they’re presumably being supported by someone.

What the CBO report projects is, effectively, that the ACA will exacerbate that trend. You can read the entire report online by downloading the PDF linked here; this excerpt is on p. 117-118:

The estimated reduction stems almost entirely from a net decline in the amount of labor that workers choose to supply, rather than from a net drop in businesses’ demand for labor, so it will appear almost entirely as a reduction in labor force participation and in hours worked relative to what would have occurred otherwise rather than an increase in unemployment (that is, more workers seeking but not finding jobs) or underemployment (such as part-time workers who would prefer to work more hours per week).

CBO’s estimate that the ACA will reduce employment reflects some of the inherent trade-offs involved in designing such legislation. Subsidies that help lower-income people purchase an expensive product like health insurance must be relatively large to encourage a significant proportion of eligible people to enroll. If those subsidies are phased out with rising income in order to limit their total costs, the phaseout effectively raises people’s marginal tax rates (the tax rates applying to their last dollar of income), thus discouraging work.

That is, as the White House statement noted, the report doesn’t say that the ACA “hurts jobs”. The CBO says that for many Americans, the law disincentivizes work. If you are, for example, a worker who earns an hourly wage and buys insurance via the exchanges, you may have an incentive to limit your hours so your income doesn’t exceed 400% of the federal poverty line, because once that happens, you may abruptly lose your eligibility for federal subsidies.

It should be said that these kinds of projections are necessarily imprecise; the CBO is basically trying to predict how workers will respond to incentives over the next ten years in light of conditions as they apply today. However, the White House can’t be completely dismissive of the CBO’s projection about the labor force participation rate, because in the statement this morning it basically agreed with it, and touted it as an exciting advantage of the law in question:

Over the longer run, CBO finds that because of this law, Americans will be empowered to make choices about their own lives and livelihoods, like retiring on time rather than working into their elderly years or choosing to spend more time with their families.

This is, in my opinion, a slightly glib way to put it. There will, no doubt, be many Americans, and in particularly many American women, who choose to spend more time with their families because once they figure out the family budget, it’s not worth going to work when doing so means paying for childcare and losing their insurance subsidies. Whether that’s a good decision or a bad one is probably subjective, and affected by individual circumstances.

What strikes me about the CBO report, though, is that we’re suddenly looking at a decade where the anemic labor force participation rate is not just an effect of the recession and the faltering recovery, but a predictable consequence of this wide-ranging new law—something that’s arguably encouraged by the way the law was designed. I don’t know if any politicians wanted that outcome. None of them publicly anticipated it, though. And I hope some of them are prepared to give some serious thought to its ramifications.

( Getty Images / defun )

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