by MARYANN O. KEATING, PH.D.

To paraphrase champion prize fighter emeritus, Mohammed Ali, workers in U.S. labor markets tend to be mobile, agile and hostile. Gone are the days when a family’s primary wage earner grits his or her teeth and endures whatever it takes to bring home the bacon. The Indiana Business Research Center notes that Indiana’s workforce is projected to decline. These reports suggest that incentives have changed and workers have responded.

The U.S. Bureau of the Census finds that Indiana’s dependency ratio, the number of youth (under 20) plus elderly (65 and older) for every 100 people of working age, could rise from 69.9 in 1995 to 80.7 in 2025. The Social Security board of trustees reports that in 2010 there were just 2.9 full- or part-time workers who paid some Social Security taxes in 2010 for each individual who received Social Security benefits. Part of this decline is due to the demographics of age and, recently, the Great Recession. A separate issue is a residual that can only be explained by voluntary withdrawal from working for a wage, a reluctance, so to speak, to punching the clock.

There are several reasons for labor force drop-outs. The increased wealth of some households permits young adults to delay and elders to exit paid employment. Two-earner households offer job flexibility. Finally, the government social safety net supplements wage income. The choice to enter or leave the workforce depending on personal circumstances is good; wage slavery is not a macroeconomic goal.There is a large group of Americans, however, who would be willing and able to work at higher wages, net of taxes. Not only does the tax wedge between what firms are willing to pay and what workers take home inhibit labor participation, there are, unfortunately, disincentives for individuals to persevere in finding and continuing in paid employment. In a 2009 study, Schmidt and Sevak found that a 10-percent increase in after-tax earnings would increase labor force participation by 7.5 percent for men and 11.4 percent for women. Lower taxes on wages with more people working could actually increase total tax revenue collected.

Observe the backbiting between women who choose to work at home and volunteer and women who participate in the labor market. One enters this eternal discussion at risk. Most would agree, however, that freedom to work in or out of the household is the hallmark of a free society. Furthermore, the extent to which a person participates in the labor force should not be an either or choice, but that additional hours on the job should yield more dollars on one’s pay stub.

Americans on average retire more than two years earlier than they did in 1960, in spite of less-strenuous jobs and longer life spans. This affects both tax revenue and contributions into Social Security. However, a study by Briggs, Weaver and Reznik found that for each dollar of additional payroll taxes, a near-retiree pays into Social Security, he or she receives only around 2.5 cents in extra lifetime benefits. Most female retirees receive spousal benefits from Social Security based on their spouses’ earnings, and this benefit does not increase if she extends her employment and contributes to Social Security on her own account. For younger or low-income workers, the difference between expected benefits and taxes paid in a given year is negative.

It should be noted, however, that single moms represent a group least likely to have a choice about hours worked; they tend to have less wealth and earn low wages. As they work harder to maintain a certain level of income for their families, they pay higher taxes and jeopardize their eligibility for government transfers. For better or worse, the Internal Revenue Service can count on these women to remain in the labor force.

Labor supply, how workers respond to increases or decreases in wages, is extensively studied in economics. Older studies suggest, at least for men, a low response in labor-force participation with respect to after-tax wage rates; higher taxes did not significantly affect hours worked.  In a 2004 study analyzing labor participation over a worker’s lifetime, however, Imai and Keane found that given higher taxes, workers not only reduce hours worked but also shift their lifetime labor supply, working less at older ages and more at younger ages. Younger workers have more of an incentive to use jobs both to learn and to accumulate wealth. Some labor force analysts are recommending eliminating Social Security contributions for those approaching retirement to encourage additional years of work. Admittedly, this controversial proposal would decrease Social Security contributions, but definitely increase overall tax revenue.

Ironically, this discussion of creating tax incentives to keep elders in the labor force is taking place when many workers are doing just that. Declining home values and pension-fund balances, as well as fear of inflation, have some baby-boomers postponing retirement. In general, however, the overall rate of those over 16 years working for wages or looking for a job is declining.

We observe that even those who claim that their jobs are personally fulfilling like to get paid. The goal of public policy should not be to maximize taxes collected from wage earners or make granny work till she drops.  It is important for the well-being of Indiana families and the nation as a whole to facilitate residents, over the course of their life-times, in choosing to enter or exit the labor force.

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

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