Helping Everyone Join America’s Jobs Revolution
 

As documented in prior Trends issues, the research is unambiguous: a regular job does a lot more for individuals and society than enable a useful economic transaction.  It gives the worker something “worthwhile” to do on a regular basis.  In the process, it minimizes the time available for engaging in crime and addictions.  In American culture, “who you are is determined what you do”; whether you’re a carpenter, plumber, technician, manager or attorney; that’s why having a job gives you a sense of belonging and identity.  It also builds skills, confidence, and social bonds.  Beyond that, it provides the worker the “sense of pride” that comes from economic self-sufficiency and the knowledge that he or she is earning something, rather than being given things.  Furthermore, in the case of younger males, it dramatically increases their ability to have a successful marriage and be part of a traditional nuclear family.  In short, a case can be made that a “fully employed” populous is an indispensable factor contributing to Gross National Happiness and social stability, as well as to economic growth.

Therefore, “full employment” has been an American national priority for at least the past one hundred years.  And, every presidential campaign inevitably promises to deliver more and better “jobs.”

However, except for the World War II years, the United States has had a de facto labor surplus since at least the early 20th century.  So, the demographic trends and government policies discussed in January 2020 Trends issue, which are bringing this surplus to an end, are shocking unprepared employers, workers, and government agencies.  And, for the first time in at least 75 years, we’re concerned about mobilizing and developing all our idle talent, rather than warehousing the surplus.

Three interdependent factors, combined with the natural pattern of birth, death, and economic growth to balance labor market supply and demand:

- Immigration, which increases the supply of labor beyond natural population growth;

- Off-shoring and imports enabled by globalization, which lowers the demand for U.S. labor; and

- Automation, which lowers the demand for workers, all other things being equal.

Each of these major factors, and several lesser ones, can be considered a curse or a blessing depending on how it’s managed, the timeframes considered and the intrusion of nonmarket factors.

However, over the past 120 years, the bottom-line result was that a significant share of the American people was not able to have productive jobs in our economy.  That led to the creation of a “permanent dependent class,” which relies upon the government for their survival.  To address this problem a set of institutions we now call the “social safety net” was developed in three major waves known as the Progressive Era, the New Deal, and the Great Society.
 
This has created a modern American population consisting of six categories:

- Students, most of whom are 24 years of age or younger;

- Unpaid caregivers, such as parents not employed outside the home;

- Those who are participating in the labor force, which includes those employed full or part-time as well as those looking for work in the public or private sectors;

- Those classified as disabled;

- The retired, most of whom are over 55; and

- Others, including those in prison.

The disabled, unemployed, retired, and imprisoned are all supported, at least in part, by the social safety net.

The stagnation in employment from 2000 to 2016 is exactly what we expect to see during the Transition phase between the Installation and Deployment phases of every Techno-Economic revolution.

During the Transition phase of the Mass Production Revolution, in the 1930s & 1940s, labor force participation remained high because the social safety net was weak; the excess was reflected in skyrocketing “unemployment.”  To compensate, the Government created jobs through programs like the Works Progress Administration, and later, the public-private “war economy.”

Similarly, the transitional phase of the Information Revolution brought its own employment crisis in the years 2000 to 2016.  However, rather than job programs, the government used the dramatically expanded safety net programs including Social Security Disability.  The difference is that “make-work” jobs programs are easily scaled-back permitting the subsidized and enhanced human capital to be redeployed.

So today, as the Golden Age of the Fifth Techno-Economic Revolution accelerates, many healthy, working-age American adults are not working but receiving significant government-funded help.  In fact, their income largely comes through programs like SNAP, Medicaid, and housing assistance, as well as the Social Security Disability program.  And notably, evidence shows that the programs providing that assistance have done little to help these individuals move out of poverty as the job shortage abated.  That’s not surprising, since their funding usually creates incentives to add more people to their rolls.  Consequently, these anti-poverty programs wind up inadvertently inhibiting work and upward mobility, as well as exacerbating hopelessness, entitlement, loneliness, and susceptibility to addiction.

For example, in 2018, at least 9.5 million working-age adults were receiving benefits in the Medicaid and SNAP food stamps program, while reporting zero earnings.  While that’s a minority of the total number of recipients on these programs which also include seniors and children, it’s a large number, nonetheless.
 

The impact of this idle-adult population shows up in the labor force participation stats.  Even though our country is 10 years into an economic recovery, with U3 unemployment at 3.5 percent, we are still well below the pre-recession proportion of working-age Americans in the workforce.

Behind this low labor force, the participation rate stands the extraordinary rise in those on Social Security Disability.  In July 2015 Dr. Vincent J. Malanga and Dr. Lance Brofman published a report titled Disabilitys Destabilizing Impact on the Labor Market.  They noted that labor force participation had historically behaved cyclically within a gently declining trend.  Participation consistently tended to fall during recessions and rise during economic recoveries as job prospects improved.   But, in the most recent business cycle, from 2000 through 2015, the labor force participation rate fell as expected during the recession phase, but it kept falling during the recovery as well.  Since then, there has been an improvement in labor force participation as well as the bellwether participation rate for males in the prime working-age category of 25 to 54. Nonetheless, the participation rate for prime-aged men is still far below the rates of the 1990s.

Notably, the outsized rise in disability payments in the Great Recession essentially bankrupted the system and forced a congressional bailout in 2015.  In a March 2018 report titled Disability and Participation, Malanga & Brofman explained that as part of the 2015 bailout legislation, various reforms were enacted, such as requiring medical evidence for disability claims.  Another reform excluded individuals and entities convicted of felonies related to the Social Security Act or who had been previously penalized for the submission of false evidence from acting as sources of medical evidence.

As the latest data indicates, these reforms were responsible for the decline in disability rolls that began to occur in 2016.  Indeed, even though the total population has increased, the numbers applying for and receiving disability payments has declined since 2015.

Most Social Security disability claims are processed through a network of local Social Security Administration field offices and state agencies.  Today, we can see that applications at both the field offices and state agencies have finally declined to below pre-recession levels.  The same is true of the numbers receiving benefit awards.  And, while there is considerable volatility in the monthly data, a twelve-month moving average of the data clearly shows a downward trend.

The actual number of Americans receiving disability payments is about 8.4 million and began declining from about 9 million in 2016.  Coincidentally, labor force participation has been improving in jagged fashion since 2016.  And the news is likely to get better. While some of the reforms introduced by the 2015 bailout legislation were immediately enacted, some are being phased in; and others will not take effect until 2022.

Building on the changes already in the pipeline, the Trump administration proposed a series of new regulations relating to the administration of the Social Security Disability program in November 2019.  These rules would have the effect of reducing the number of people collecting disability payments by conducting more frequent reviews of whether a person’s medical condition improved sufficiently to allow substantial gainful activity. The rule would create a new category of recipient, called “Medical Improvement Likely,” where reviews would occur biannually.

This new rule can be viewed as another in a series of reforms that have been introduced in an effort to curb abuses in the disability program over the past decade.  As might be expected there were protests by beneficiary groups and members of Congress regarding proposed changes.  A letter and press release in December asserted that the proposed rule would have a very significant and potentially harmful impact on Social Security and SSI disability beneficiaries.  The letter also urged that the comment period for the proposed new regulations be extended by 45 days beyond the mid-January 2020 cutoff date.  However, the request was denied by the Office of Disability Policy.

In support of the proposed rule change, the Office of Disability Policy cited advances in medical technology and the results obtained by research from the National Bureau of Economic Research regarding a group of beneficiaries and recipients whose benefits terminated due to a 1997 statutory change.  The research effort examined the effect of a loss of benefit eligibility on work activity during the year of benefit termination and the subsequent eleven years, 1997 to 2008.  Overall, about 22 percent returned to work at a substantial gainful activity level during the first three years following benefit termination.

Presumably, reforms under the new proposed rule will begin to be implemented in 2020.

Abuse of the disability system is not the only cause of the downward trend in labor participation that has been in effect since the 1990s.  No doubt the opioid crisis and other varieties of increased substance abuse have had an adverse effect on society generally as well as workforce participation.  Other factors are undoubtedly at work as well, but at least there are specific efforts being made to curb flagrant abuse of the disability system.

Given this trend, we offer the following forecasts

First, the existing and proposed changes to the disability system will have a major impact on the workforce.

Indeed, with the overall unemployment rate hovering around a post -World-War-II low of 3.5%, labor markets are tight yet inflationary wage increases remain notably absent.  Currently, the participation rate for prime aged males is 89.2 percent versus the absolute 2014 low of 87.9 percent.  Maintaining this upward trajectory would go a long way toward reinforcing the economy’s growth record.  Given normal labor force growth of about 1% per year, if the participation rate for prime-aged males were merely to get back to the roughly 91% level that prevailed before the Great Recession, new workers would be generated at a rate of about 1.2 million yearly.  This would provide further support for consumer spending, overall economic growth, and social stability.

Second, putting the genuinely disabled onto a path to participate more fully in the economy will be worth the effort.

The big payback from disability reform comes from putting to work those who are not legitimately disabled.  However, there is is a lot to be said for finding ways to gainfully employ disabled people who deserve more from life than playing video games and watching TV.  A combination of employer incentives and adaptive technology could enable people with physical and cognitive impairments to create value.  This is not only good for the employee, but for the employer and the broader community.  And,

Third, reforming college loan programs will also help produce more and better-prepared workers in the medium term.

Over the past two decades, much of the surplus worker population has been shunted into “academic holding” cells because the economy was not able to absorb them.  Changes in the college loan criteria made it possible for almost anyone to borrow money for almost any field of study, regardless of their prospects for repaying the loan.  In all too many cases, this not only took the person out of the labor pool for four to six years, but it also eliminated the opportunity that the person would have had to get “on the job training” during those years.  Because of the poor outcomes, the status quo is untenable.  The likely solution is that fewer students will attend full-time liberal arts Bachelors’s programs and more will pursue part-time vocational programs.  Coupled with skills-based immigration priorities, and reform of the disability system, this will go a long way toward eliminating America’s growing skills shortage.

References

1. Trends.  July 15, 2019.  Trends Editors.  Eliminating Poverty and Maximizing Happiness. 

https://audiotech.com/trends-magazine/eliminating-poverty-and-maximizing-happiness/

2. AEIdeas.  July 2017. Kevin C. Corinth.  Barriers to Work and Social Enterprise. 

https://www.aei.org/wp-content/uploads/2017/07/Barriers-to-work-and-social-enterprise.pdf

3. AEIdeas.  January 2018.  Angela Rachidi.  The Working Class and the Federal Government’s Social Safety Net. 

https://www.aei.org/wp-content/uploads/2017/07/Barriers-to-work-and-social-enterprise.pdf

4. Seeking Alpha.  Jan. 26, 2020.  Lance Brofman.  Disability Reform And The Labor Force. 

https://seekingalpha.com/article/4319122-disability-reform-and-labor-force

5. Seeking Alpha.  March 18, 2018.  Lance Brofman.  Disability And Participation. 

https://seekingalpha.com/article/4157404-disability-and-participation