In January 2009, when President Obama took the oath of office, the unemployment rate was 7.8 %. It would rise to 10.0 % by October of the same year before leveling off and beginning to decline. It would be two full years before the rate fell below 9.0 % when it reached 8.8 % in October of 2011. As I write these words in October 2014, the rate has fallen to below six percent (5.9 %) for the first time since July 2008.
Surely this is progress. Yet there is an even more important labor statistic that is only rarely discussed but a better reflection of the strength of the job market. I’m referring to the labor force participation rate.
When President Obama began his term of office in 2009, the labor force participation rate was 65.7 percent. When the recession ended in June 2009 the labor force participation rate was still 65.7 percent. But then it began a steady decline. In 2014 the labor force participation rate is down to 62.7 percent, the lowest rate since 1978 (See Figure 1). That’s a drop of three full percentage points since Obama took office. In real numbers that represents nearly 8 million workers.
Figure 1 – Labor force participation rate from 1978 to 2014
It is important to understand that when the labor force participation rate goes down, fewer people are looking for work. They have given up trying to find a job. The job market is so bleak that they accept the fact there are no jobs out there and they settle for government assistance. That’s bad for them – but good for the government! When they stop looking for work they are no longer counted in the statistics used for determining the unemployment rate. Therefore the unemployment rate goes down even though they didn’t find a job.
Therefore, the White House can brag about the declining unemployment rate but there are actually fewer Americans employed. If the labor force participation rate rose to 65.7 percent, where it was when President Obama took office in 2009, the unemployment rate would actually still be above 10 percent (See Figure 2).
You won’t hear the White House referring to the labor force participation rate because it doesn’t support their narrative that the economy is improving. But even liberal media such as The Atlantic grudgingly concedes the point. Jordan Weissmann writes:
“The workforce participation is an important figure because it tells us details about the job market that the ordinary old unemployment rate tends to obscure. When the Labor Department tabulates its data, it only counts adults as “unemployed” if they don’t have a job but are still hunting for one. People who have given up searching for work get left out of the equation. So if enough people get discouraged by the barren labor market and stop looking for jobs, the unemployment rate, perversely enough, goes down.”
Figure 2 – Unemployment rate using 2009 Labor Force Participation Rate
Economists agree this has been the slowest recovery from a recession since the Great Depression of the 1930s. According to economist Peter Ferrara, contributor to Forbes, since the Great Depression, recessions in America have lasted an average of 10 months, with the longest previously being 16 months. Yet today we are more than 5 years since the end of the recession in June 2009 and the effective unemployment rate, as explained above, is really above 10 percent.
The Impact of ObamaCare on Jobs
How do we explain this “jobless recovery”? Typically, the deeper the recession, the more robust the recovery. But not so this time. There may be disagreement among economists on the nuances of this slow recovery, but there is little disagreement that ObamaCare has been one of the important factors.
This legislation was passed on March 23, 2010, just nine months after the end of the recession in June 2009. Employers knew it was coming since it was debated for all of 2009 and early 2010. Many stood on the sidelines, waiting to see the final version of the law to calculate its impact on their business. It now seems they were wise to wait because the impact has been significant.
The Federal Reserve Bank Surveys
In an effort to evaluate the impact of ObamaCare on the job market, three Federal Reserve Banks – in Philadelphia, New York, and Atlanta – conducted surveys of area businesses. Their findings were released in August 2014 and revealed the following:
Federal Reserve Bank of Philadelphia
- 18.2% of employers say they cut workers versus 3.0 percent who hired more.
- 18.2% say the proportion of part-time workers is higher versus 1.5% who say it is lower.
- 13.7% reported more outsourcing to other firms versus 3% with less outsourcing.
Federal Reserve Bank of New York
- 21% of manufacturers say they are reducing employment, while 3% are increasing their workforce.
- In the business leaders survey on the same issue the responses were 16.9% versus 1.6%
- Among manufacturers, 19.3% say they are increasing the proportion of part-time work, while 3.5% say they are reducing it.
- In the business leaders survey on the same question the numbers are 20.2% versus 4.8%
Federal Reserve Bank of Atlanta
- 34% of businesses planned to hire more part-time workers than in the past, mostly because of a rise in the relative costs of their full-time colleagues.
In specific questioning about the impact of ObamaCare, the New York survey is especially informative:
- More than one third of manufacturers say that ObamaCare is increasing costs “a lot” this year and more than half say the health law will increase costs a lot next year.
- Among New York business leaders, more than one in four say ObamaCare is increasing costs a lot this year and more than one third predict substantial cost increases next year.
Economist John C. Goodman says, “The new health law is discouraging a significant number of firms from hiring and is also pushing workers into part-time, rather than full time jobs.” He also points out the academic works of other economists such as Casey Mulligan, The University of Chicago, and Greg Mankiw of Harvard University.
Mulligan has calculated the marginal costs of working due to the perverse incentives of ObamaCare and concluded that ObamaCare lowers the return from working by 10%. In other words, disincentives in ObamaCare keep people from going back to work. Mankiw explains this negative effect on workers results in a loss to the economy on the order of 5% of GDP – or more than $800 Billion a year at current prices. Fewer workers means less produced. The indirect cost to the economy, as a result, equals more than $8,000 per household per year.
Three Negative Impacts
Avik Roy, healthcare policy analyst for Forbes, believes there are at least three negative impacts of ObamaCare on the job market:
- ObamaCare is one of the largest tax increases in U.S. history
ObamaCare increases taxes by more than $1.2 Trillion over the next decade, making it one of the largest tax increases in U.S. history. The largest of these tax increases is the 40% tax imposed on “Cadillac plans” beginning in 2018. There is also the 3.8% surtax on investment income for high earners and businesses filing as individuals; a 0.9% increase in the Medicare payroll tax for high earners; the individual mandate tax imposed on everyone who fails to purchase health insurance; the employer mandate tax, and the excise taxes on health insurance premiums ($63/premium/year), medical devices, and pharmaceuticals.
Most perverse for the job market is the tax on investment income as it affects small businesses. According to Ernst & Young, 54 percent of the private-sector workforce is subject to the individual income tax rate. While not all of those businesses earn enough income to be affected by the ObamaCare tax, affected businesses will have to make up the difference by either hiring fewer workers, or charging higher prices for their goods and services, or both.
- ObamaCare increases the cost of employing workers
The employer mandate requires employers to provide health insurance or pay substantial taxes. The employer mandate is a strong incentive for small businesses to keep their work force under 50 full-time employees and to move full-time employees to part-time status.
For those employers who do provide heath insurance to their workers, the costs of that health insurance are going up because of ObamaCare. The required “essential health benefits” compels employers to purchase insurance plans that provide benefits many of them do not need – yet they must pay for them nevertheless. This increases the cost for everyone. As labor costs go up, employers have less money to employ more workers.
- ObamaCare’s exchange subsidies encourage many workers to drop out
Roy is referring here to the work of Casey Mulligan again. He finds that ObamaCare’s subsidies are “roughly equivalent to doubling both employer and employee payroll tax rates for half of the population.” In other words, the half of the population that is eligible for ObamaCare subsidies.
Some supporters of ObamaCare have pointed to the experience of Massachusetts under Romneycare – where labor force participation was not substantially affected – as proof that ObamaCare will do fine on this score. But Mulligan estimates that “the ACA will increase the national average marginal labor income tax rate about fourteen times more than the 2006 ‘Romneycare’ health reform law increased the Massachusetts average rate.”
ObamaCare is having adverse impacts on the job market at a time in our history when more people have fallen out of the labor force for lack of a job since 1978. Despite President Obama’s professed interest in improving our economy and creating more jobs, his policies, especially ObamaCare, are the root cause of our continued “jobless recovery”.