October 19, 2021

Questioning the Jobs Rhetoric

by Maryann O. Keating, Ph.D.

Americans are awakening to the fact that political rhetoric concerning job creation is no longer so reassuring. Why exactly are politicians so focused on efforts to increase labor force participation? Will policies intended to increase participation actually be effective? 

U.S. job growth this September came in 300,000 jobs short of what economists predicted. In August, the gap was almost half a million short. These figure are surprising since the rate of those actually seeking a job in down and the $300 a week federal supplement to standard state jobless benefits expired in late August. A mismatch between available jobs and those to which individuals aspire is one explanation. However, there is something more at stake. 

The labor force participation rate is the percentage of the population 16 and older that is either working or actively looking for work. The labor force participation rate for Indiana peaked at over 70 percent in 1995 and was just 62.9 percent in August of this year. Will participation return to its pre-pandemic level? Or, does this change reflect a long-term shift? 

Generous family paid leave policies, subsidized daycare and free community college tuition are being proposed to encourage labor-force participation and job training. However, similar policies abroad are associated with decreased labor force participation and lower economic growth. For example, Italy offers 22 weeks of maternity leave at 80 percent of previous earning; France, 16 weeks at 90 percent and Spain, 16 weeks at 100 percent. A 62.6 percent participation rate in the U.S. contrasts with 49.7 percent in Italy, 55 percent in France, and 57.7 percent in Spain (“The Entitlements of U.S. Decline,” the Wall Street Journal, October 7, 2021). 

It is uncertain that policies designed to increase labor force participation, even those targeted at lower-income households, will be effective. Government policies can nudge behavior in a particular direction, but, in a free country, personal decision-making overrides government incentives. Politicians can entertain a vision of ideal labor force participation and imagine that with just the right policy mix that goal will be realized. However, every working-age person is uniquely motivated to realize personal goals. 

Jobs are essential for most people, plus offering satisfaction and connection with society. However, some personal discretion remains in determining how much time and effort each individual is willing to allocate to earning wage income.

Policies may temporarily incentivize people to accept a job, but cannot consistently fool rational people into extended rates of labor force participation when wages adjusted for inflation are expected to decline and be taxed at a higher rate. 

With state and federal marginal taxes on wage income approaching 50 percent, workers at all income levels may be questioning how the wedge between wages earned and take-home pay affects their future. They may be willing to take advantage of any pro-job entitlements, but regret having half of their paycheck pay for services which they do not value of for which they are not eligible. 

European cradle-to-grave transfer programs are financed by the middle class via value-added and payroll taxes. The combined employer-employee social security tax rate is 36 percent in Spain, 40 percent in Italy and 65 percent in France; this compares with approximately 13 percent in the U.S. Value-added taxes in most European economies are around 20 percent compared with similar, but significantly lower, sales taxes in the U.S. 

Is it being too cynical to suggest that politicians are less interested in supporting job creation than in maximizing tax revenue? If declining real take-home compensation reduces taxes generated from labor-force participation, politicians will be forced to consider alternate sources of revenue to realize their political agenda. 

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.


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