High Unemployment Caused by Welfare Programs

June 10, 2013 - NCPA

The market tanked recently on bad preliminary job news. And so, when the most recent jobs report was released, the unemployment rate and the number of new jobs came under close scrutiny. Even the Federal Reserve focuses on the unemployment rate, announcing on a number of occasions that a rate of 6.5 percent will indicate when it is time to start raising interest rates and winding down the Fed's easy-money policies. Yet the unemployment rate is not the best guide to the strength of the labor market, particularly during this recession and recovery, says Edward P. Lazear, a fellow at the Hoover Institution.

Instead, the Fed and the rest of us should be watching the employment rate. There are two reasons.

A better measure of a strong labor market is the proportion of the population that is working, not the proportion that isn't. In 2006, 63.4 percent of the working-age population was employed. That percentage declined to a low of 58.2 percent in July 2011 and now stands at 58.6 percent. By this measure, the labor market's health has barely changed over the past three years.
The headline unemployment rate, what the Bureau of Labor Statistics calls "U3," uses as its numerator the number of individuals who are actively seeking work but do not have jobs. There is another highly relevant measure that captures what is going on in the economy. "U6" counts those marginally attached to the workforce -- including the unemployed who dropped out of the labor market and are not actively seeking work because they are discouraged, as well as those working part time because they cannot find full-time work.

Every time the unemployment rate changes, analysts and reporters try to determine whether unemployment changed because more people were actually working or because people simply dropped out of the labor market entirely, reducing the number actively seeking work. The employment rate (that is, the employment-to-population ratio) eliminates this issue by going straight to the bottom line:

Why have so many workers dropped out of the labor force and stopped actively seeking work? Partly this is due to sluggish economic growth. But research by the University of Chicago's Casey Mulligan has suggested that because government benefits are lost when income rises, some people forgo poor jobs in favor of government benefits -- unemployment insurance, food stamps and disability benefits, among the most obvious. Government subsidization of poverty through welfare program is creating the poverty and unemployment in the United States today.

Source: Edward P. Lazear, "The Hidden Jobless Disaster," Wall Street Journal, June 5, 2013.