The Working Poor Confound the ExpertsBy , , and
The left and the right alike have pounced on the drop in Americans’ labor force participation rate to score political points. The rate tied an almost 37-year low of 62.7 percent in December, according to data released on Jan. 9 by the U.S. Bureau of Labor Statistics. And the poorest families are the least likely to be in the labor force.
So this factoid should come as a big surprise: Low-income families are the only ones whose participation rate has risen. The average for families in the lowest tenth of households by income rose by 11 percentage points over a 13-year period, to just under 44 percent. The participation rate of families in the top tenth of incomes fell by a little more than 3 percentage points, to just under 80 percent. To put it simply, the poor have been stepping forward while the rich have been stepping back.
These calculations were made by Nicolas Petrosky-Nadeau, a senior economist at the Federal Reserve Bank of San Francisco who is on leave from Carnegie Mellon University. He dug up the new data in collaboration with Robert Hall, an economist at the Hoover Institution and Stanford University. Petrosky-Nadeau says he and Hall were surprised by what they found, as are other economists who have seen the numbers. “They’re fascinated,” he says. “It goes against their priors”—that is, what they previously believed.
The labor force participation rate is defined as the share of people who have jobs or are actively looking for work out of all people age 16 and older, excluding those in the armed forces, prison inmates, and residents of nursing homes. The rate is on a downward trend overall because of the retirement of the Baby Boom generation. Petrosky-Nadeau and Hall compared participation rate averages from March 1998 to February 2000 with those from August 2011 to July 2013, as well as points in between. They found that the rise in the participation rate for the lowest-income households continued through the deep 2007-09 recession, then leveled off around 2010. What makes the increase more surprising is that the starting point for the analysis was a period when the economy was extremely strong; the unemployment rate got as low as 3.8 percent in 2000. Yet the poorest Americans are more likely to be working now than then.
The research undermines the Democratic case that rapid economic growth is essential to alleviating poverty, because it makes labor markets so tight that employers have no choice but to hire people some would prefer to avoid, such as racial minorities, the long-term jobless, the handicapped, and ex-convicts. “The movement to full employment draws on a reserve army of the underemployed as well as of the unemployed,” Brookings Institution economist Arthur Okun wrote in an influential 1973 paper called Upward Mobility in a High-pressure Economy. A 1999 working paper by Richard Freeman of Harvard and William Rodgers III of the College of William and Mary found that the strong demand for workers in the ’90s expansion disproportionately boosted the employment and earnings of less-educated young men, “especially young African American men in tight labor markets.” If the data from Petrosky-Nadeau and Hall are right, then Okun’s “high-pressure economy” isn’t essential to drawing more marginal workers into the labor market.
The research also weakens the Republican case that the welfare state keeps people from working. Wisconsin Representative Paul Ryan, in the Republican response to the State of the Union address in 2011, warned of “a future in which we will transform our social safety net into a hammock, which lulls able-bodied people into lives of complacency and dependency.” In 2012 the Heritage Foundation criticized the food stamp program for discouraging people from working and said it should be turned into “a work activation program [that] would seek to increase employment among able-bodied, nonworking food stamp households.” Yet it now appears that low-income families were entering the labor force even as the food stamp rolls set records during and after the last recession.
Jerome Ellison, 57, is one of those people on the bottom of the income scale working harder than ever. At night he unloads United Parcel Service trucks at Philadelphia International Airport. During the day he’s a housekeeper at a nursing home. He earns enough to rent a $350-a-month room in a house in West Philadelphia. Most nights, dinner is microwave noodles. “I’m out here every day trying to do the right thing,” Ellison says, “and prevent myself from going on welfare.”
Petrosky-Nadeau says he and Hall haven’t had time to figure out why low-income households have bucked the downward trend in labor force participation. One possible explanation, he says, is rising income inequality: The poorest families worked more because they needed the money. The richest worked less because they didn’t need it as much, and they spent their time on other things. There’s also a possibility that the new numbers are wrong, but Petrosky-Nadeau says the data came from the best source for information on the benefits and work patterns of the poor, the U.S. Census Bureau’s Survey of Income and Program Participation. He and Hall plan to check their numbers against other sources, such as the Current Population Survey.
If the research stands up to scrutiny, a lot of people are going to have to revisit their beliefs about why the poor do and don’t go to work.
The bottom line: About 44 percent of the lowest-income households in the U.S. are now in the labor force.
To continue reading this article you must be a Bloomberg Professional Service Subscriber.
If you believe that you may have received this message in error please let us know.