The new normal: why low workforce participation rates and bad trade policies mean that the U.S. will be stuck in low growth and high real unemployment for the foreseeable future

     The United States right now is facing a weak economy, high unemployment, and low growth. There have been periods of recovery throughout the recession, but all have been followed by disappointing results. It has been over 4 years since the official end of the recession. Even before the recession, growth was much lower then in the mid 90s. From 1994-2000, the United States averaged an annual growth rate of about 4.05%. From 2003-2006, at the height of the U.S. economy on the last decade, the growth average was almost a full point lower, at about 3.18%. From 1994-2000, unemployment consistently fell or stayed put. In January 1994 it was 6.6%, falling to 5.1% in August of 1996 to 4.5%  in May 1998 and to under 4% in 2000. Although some of the growth toward the end of the period was driven by the technology bubble, the fact that the recession afterward was only made much worse after the terrorist attack of Sept 11, 2001 shows that despite the bubble, underlying economic conditions were still good. The period from 2003-2006 also saw a drop in the unemployment rate, although not to as low as a level as seen in 2000, and the low unemployment lasted for a shorter period of time. This period was driven not by one but two bubbles, a banking one and a lending one, which would prove to be much larger than the technology bubble. Yet despite this, the period from 2003-2006 was worse in regards to both growth and unemployment than from 1994-2000. The fact that conditions were dissapointing even before the recession reveal a worrying reality: that structural, not cyclical factors are hampering the U.S. economy. This is also known as secular stagnation. From 2001 onward, the economy was unable to create many jobs or produce good growth without a bubble, and even with the bubble conditions were not great. Former treasury secretary  Larry Summers admitted this in an interview with the Washington post. The United States is in danger of following a path similar to Japan, and France: consistently poor GDP growth, low workforce participation, and excessive regulation combined with relatively high unemployment and low inflation to create a economy that is permanently bad.


      Even worse news is that when one takes into account lower workforce participation, one can see that the unemployment rate is underestimating the number of people out of work. The workforce participation rate is now at a very low 63.0%. It has been in decline for a while. In 1998 around its peak it was at 67.1%. At that time it was expected to decline to about 63.0%, but in 2025 not 2014. In November 2007, the month prior to the recession it was at 66.0%. As the unemployment rate peaked at 10.0% in October 2009, workforce participation was at 65.0%. Despite the fall in unemployment by over 3.0%, the workforce participation rate has decline by 2.0%. This means not only that much of the decline was artificial, but also that the U.S. will have relatively fewer jobs because relatively fewer people are working. In short, unless this major problem is solved, it is highly unlikely growth can be sustainably what it was in the mid-2000s, let alone the mid to late 1990s.


      One thing that contributes to the low workforce participation rate is the excessive social safety net.  The retirement age had remained 65 ever since 1938. It was not until 1983 until a very small raise in the retirement age was introduced for people born after 1938, gradually rising to 67 for people born 1959 or later. In 1938 the life expectancy in the U.S. was 63.5 years. In 1983, even when in had risen to 74.6 years, the retirement age barley budged. In 2011, the life expectancy was 78.7 years. Despite the over 15 year increase in life expectancy, the official retirement age has barely moved since 1938. This contributes to the low workforce participation rate. The fact that there is an over 15% drop in workforce participation from ages 62-64 to ages 65-69 confirms this.  In addition to an early retirement age, disability claims are also being abused. Disability claims rose by during the recession. From 2008-2009, applications for the program rose by 21%, and from 2007-2011 the number of people collecting disability claims rose by 2.8 million, or about 20%. This is a significant increase that needs to be addressed. The Affordable Care Act makes the problem of less people working even worse. According to the CBO,  from 2014-2024 2.5 million less people will work full time because of disincentives to work by the Affordable Care Act.

      A low workforce participation rate is bad for the economy and country for many reasons. One reason is that with less people working, less income is made, causing both tax revenues to fall and  average household income to fall. It also means that less work and production is done, causing growth rates to fall. Lastly, with less people working, the people who are working will have a bigger average burden to support the people who are not.

I my next segment, I will discus the United State's poor trade policies and how it hampers growth.

http://www.ssa.gov/pubs/ageincrease.htm

http://www.census.gov/statab/hist/HS-16.pdf

http://data.bls.gov/timeseries/LNS11300000

http://www.oecdbetterlifeindex.org/topics/health/

http://www.bls.gov/mlr/1999/12/

http://data.bls.gov/timeseries/LNS14000000

http://www.cbo.gov/publication/45010

The Economist Feb 22-28 2014

http://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG?page=3

http://data.bls.gov/pdq/SurveyOutputServlet

http://www.washingtonpost.com/blogs/wonkblog/wp/2014/01/14/larry-summers-on-why-the-economy-is-broken-and-how-to-fix-it/

http://money.cnn.com/2013/04/11/news/economy/disability-payments/

http://www.washingtonpost.com/wp-dyn/content/article/2010/09/13/AR2010091306493.html

http://www.usatoday.com/new
http://www.bls.gov/opub/mlr/2013/article/labor-force-projections-to-2022-the-labor-force-participation-rate-continues-to-fall.htm



http://www.bls.gov/spotlight/2008/older_workers/

http://www.bls.gov/emp/ep_table_303.htm