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August 15, 2013

Keating: If jobs open up, will our young people take them?

There is a sub-discipline in economics that studies labor supply, specifically whether or not individuals increase hours worked outside the home when higher wages are offered. Those studies should be of interest to policymakers concerned with the fiscal and social effects of changes in the American workforce.

For years, the studies concerned themselves with the extent to which the labor supply curve bends backwards as, for instance, when high-wage doctors and lawyers reduce hours available for appointments. The consensus, at that time, was that low- and medium-wage workers had no choice but to supply the standard 40-hour work week regardless of compensation.

Now, however, government officials, concerned with the flow of tax revenue, are worried not only that jobs do not exist but that Americans are choosing not to accept them. Consequently, payroll and income-tax revenue per person is falling.  

Aside from the issue of funding government, there is the potential loss of a generation — one only loosely attached to the labor force. So, assuming for a moment that employers are willing to hire, it is useful to analyze why positions are not being accepted.

The most obvious explanation is that some individuals do not need wage income. A few are so affluent that they need not concern themselves with earning a living. But most of those not seeking or accepting work are not “trust fund babies.”

Some of us, on the other hand, are fortunate enough to extend the length of time we stay in school or remain dependent on parent income. The extension of family healthcare benefits to those 26 years old contributes to postponing full-time participation. Furthermore, it is not at all unusual for parents to indefinitely subsidize interest on student debt, car insurance and cell phones. Finally, some potential workers qualify for unemployment, disability, academic stipends and other government income assistance.

Another factor explaining the declining labor force participation rate is the differential between what people believe they should earn and the wage offered. It is repeatedly impressed on students that once they attain a certain degree or certification they will earn median wages or more. We fail to mention that this is based on probabilities for expected income over 40 years by those who were willing to pull up roots and start over several times throughout their careers.  

A careful study of data provided in the National Longitudinal Survey of Youth (NLSY) shows that family formation is critical in determining the probability that a U.S. resident, between the ages of 26 and 31, participates to some extent in the labor force.

Those with biological children, living in or out of household, have higher work participation. This is definitely true for males, but the result is also positive and statistically significant for women, regardless of the number of children. There is some indication that married women (and those who are cohabiting) are less likely to work outside the home. Marriage and co-habitation, however, strongly increase the likelihood of male employment.

What do people in their 20s do all day if they are not working or providing care? Unfortunately, the NLSY survey does not address this issue directly except to categorize those who are or are not currently enrolled in school. Data is offered, though, to show that increased television viewing by an individual is statistically associated with fewer hours allocated to earning wage income.

What are the implications of declining work participation for those entrusted with policy making? There are those who argue that the issue will self-correct as young people mature and are drawn into the labor force as the economy recovers. Others suggest exploring alternatives such as sales or value-added taxes as substitutes for taxing wage income in order to maintain government services. Most agree that we should avoid all policies that discourage employers from hiring or inhibit real take-home wages from rising.

With regards to social concerns, government policy with respect to fertility and household formation is a dangerous game fraught with hazard, here and abroad. Through the mid-1990s in the U.S., a significant marriage tax penalty in conjunction with the Aid to Dependent Children program created a lethal policy combination.   

There appears, however, to be a natural proclivity for human beings to form households and become responsible for the next generation — unless, that is, they have better options.

Maryann O. Keating, Ph.D., a resident of South Bend and an adjunct scholar of the Indiana Policy Review Foundation, is co-author of “Microeconomics for Public Managers,” Wiley/Blackwell, 2009.

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