The following originally appeared on The Washington Examiner on March 10, 2014.
With a degree of candor rare even for the Congressional Budget Office, Director Douglas Elmendorf recently testified that reduced labor force participation (the number of people either working or looking for work) was “the central factor in slowing economic growth.”
Appearing before the House Budget Committee, he further stated that “later in this decade and beyond, the principal reason why we think the economic growth will be less than it was for most of my lifetime will be a slower rate of growth by the labor force.” On our current course, Elmendorf is absolutely correct.
Both slow growth and a decline in the percentage of people working or actively looking for work condemn our youth to economic stagnation and deprive them of the opportunities that come with prosperity and a job. The Bureau of Labor Statistics defines the labor participation rate as the percentage of the population over 16, available for work and either employed or actively seeking employment. As the somewhat terrifying chart above demonstrates, labor participation has been declining at an unprecedented and precipitous rate since President Obama assumed office. For the last five months, it has been at or slightly below 63 percent, the lowest rate since April 1978 during the Carter administration.
The president’s defenders argue that this disconcerting decline is due to baby boomers retiring rather than the president’s economic policies. This argument simply misses the point.
The CBO attributes the labor force participation rate’s decline 50 percent to economics (poor job prospects in the current economy) and 50 percent to demographics (the aging of the population). Whatever the reason, the fact that we can explain the decline doesn’t mean we have to accept it. To the contrary, unless we reverse it, future generations will never experience the level of economic opportunity past generations have experienced.
We can reverse it by implementing policies that encourage private-sector job creation, which will increase the demand for labor and incentivize people to join the labor force. But Obama’s economic policies consistently limit the ability of businesses to create jobs and discourage people from working.
Entrepreneurs create jobs when they’re able to expand or create businesses. They do so when they can develop business models that show a profit. It’s difficult to develop profitable business models when government policies keep increasing costs.
By increasing marginal tax rates on high-income earners, the president has decreased the profits small business owners can invest in growth, as most are organized as sole proprietor or S corporations. Navigating the increasingly complex government regulatory maze has forced businesses to spend money they could otherwise have invested in growth. Fighting a war on carbon fuels has increased energy costs, further decreasing growth.
Even anticipated costs affect business models that, by definition, forecast the future. Despite promises to the contrary, Obamacare is increasing medical insurance expense and labor costs. The Obama administration’s questionable delays and amendments to Obamacare’s employer mandate have given businesses a reprieve. But entrepreneurs know these delays are politically motivated and temporary — they know Obamacare’s increased costs are coming and they must factor such costs into their business models.
Now the president is advocating a significant federal minimum-wage increase that would further increase labor costs. As anticipated labor costs increase, businesses decrease labor, favoring reduced hours or automation as an alternative. If you increase the cost of something, businesses will use less of it. If you decrease the cost of something, businesses will use more of it. The CBO recently reported that the president’s proposed increase would result in a loss of 500,000 jobs by the middle of 2016.
It’s easy to attack businesses when they employ these cost-cutting measures. But unlike government, businesses must generate profits to grow. Businesses that consistently fail to make a profit go bankrupt. Even more disturbing, businesses that are unable to forecast a profit never open.
As the costs of doing business rise, profits supporting investment and growth become more difficult to model. Businesses can only absorb so many costs and consumers can only absorb so many price increases. At some point, business models no longer work, and growth stagnates or ceases. Absent investment and growth, there is diminished job creation and the labor participation rate declines or stagnates. It’s really that simple.
Businesses have been warning that the president’s policies are placing our economic future at serious risk. The CBO recently revealed the other side of that coin. It reported that over the next 10 years, Obamacare will cause our economy to lose the equivalent of about 2.5 million full-time jobs because Obamacare encourages people to voluntarily lower their incomes or stop working to be eligible for increased government health insurance subsidies. Testifying in front of the House Budget Committee, Elmendorf stated that “by providing heavily subsidized health insurance to people with very low income and then withdrawing those subsidies as income rises, the act creates a disincentive for people to work — relative to what would have been the case in the absence of [Obamacare].” To the extent these individuals stop working, they reduce our labor force.
As the chart at the beginning of this article clearly shows, you can’t increase labor force participation when your economic policies discourage entrepreneurs from creating jobs and your social programs discourage Americans from working.
The solution to declining labor force participation is to reduce the burdens government has placed on growth and release America’s job creating entrepreneurial energy. America’s private sector is ready, willing and able to create jobs for those still seeking the dignity, self-respect and experience that come with a job. But government must get out of the way.
More government is not the answer to a declining labor force. As history demonstrates, too much government is the problem.