President-elect Donald Trump promised to help fix the economy, and one place he could focus on is people who have dropped out of the labor market.
President Barack Obama oversaw a sluggish economic recovery throughout his time in office. The economy has improved greatly in recent years, but there is still room for improvement. One major area the president-elect could target is the labor force participation rate.
“There is definitely room for improvement,” Mercatus Center Fellow Adam Millsap told InsideSources. “That’s the easy question, though. The much harder question is what to do about it. I think going forward more economic growth would help. Growth has actually picked up this last quarter but prior to that it’s been pretty slow.”
The unemployment rate has remained low as the economy has steadily gained jobs. It doesn’t, however, factor in those who have suffered long-term joblessness. The labor force participation rate, in contrast, tracks the number of employed and those actively seeking work as a percentage of the total population. Brookings Institution Economist Gary Burtless says the next administration should focus on making sure employment continues it’s upwards trend.
“A tighter job market means higher wages for people who just joined the workforce,” Burtless told InsideSources. “It means that people who have been on the sidelines think that they will be able to find jobs more easily.”
The labor force participation rate currently sits at just 62.7 percent. It has fallen considerably since the last recession almost a decade ago even with the fairly consistent employment growth in recent years. Applied Economic Strategies Economist Mark Wilson notes addressing the tax and regulatory burden could help to encourage job growth.
“You can reduce corporate taxes, you can reduce regulations, reduce the burden on jobs and labor,” Wilson told InsideSources. “That would, of course, increase the demand for labor and that will have a direct effect on increasing the supply.”
Trump has released a detailed plan aimed at reforming our current tax system. His plan would reduce the tax burden for both higher and middle-income earners, as well as corporations. It would also simplify the tax system. A simple corporate tax system with reduced rates could have a major impact on job creation.
“The Trump administration coming in is talking about lowering the corporate tax rate to make the American tax code a little more competitive with the rest of the world,” Millsap said. “I think that would be helpful, getting the corporate tax rate down.”
Trump has also expressed interest in a major infrastructure investment program. The program could help fix issues with the national infrastructure while creating new job opportunities. National construction projects, however, face many rules and regulations, like the prevailing wage, that could limit how much jobs are created. The prevailing wage dictates what the majority of workers must be paid while working on government contracts in particular regions.
“One could relax those requirements or simply make the prevailing wage the actual competitive wage,” Wilson said. “That is something that could result in more people being hired to work on federal construction projects. It could also stretch the infrastructure dollar so you can do more.”
The working class became a critical demographic in the past election. Trump won its support by promising to help workers in industries that have been losing jobs to immigration and trade. He promised to help protect jobs, but a better approach might be to help workers transition to where they are still needed.
“We don’t have very much in the way of active labor market policy,” Burtless said. “Not programs to send people checks if they get disabled or they get unemployed, but instead programs that reengage people, requalify them for a new occupation.”
Trump has several options to help workers transition to new industries. A popular solution is federal training programs to provide those workers with the new skills they need. Burtless notes it’s a good idea to look first at existing institutions like colleges.
“I think you want to rely as much as you can on the existing institutions and just nudge these institutions so they are more welcoming in taking in nontraditional students,” Burtless said. “Not just people in their late teens and twenties.”
Republicans tend to be opposed to raising the minimum wage out of concern it will reduce employment, but a higher minimum wage could potentially help get people back to work. Some may not be incentivized to work when the only jobs available to them are low-wage. This would need to be balanced against concerns that employers can’t afford to pay more than the worker is worth.
“Increasing the minimum wage in a measured way could encourage more people to enter the labor force,” Wilson said. “The higher the cost of labor, the less labor employers are going to buy, and so you have to very carefully find the sweet spot for an increase there.”
Trump could also look to reform the welfare system as a way to increase the participation rate. Policies which reduce fraud or increase requirements have been shown in the past to help push people back to work. Wilson notes it might be time to overhaul the welfare system again.
“That had an impact on the labor force participation rate and it encouraged work,” Wilson said. “Do we need another round of welfare reform to encourage people who are able-bodied and eligible to actually look for work.”
The welfare system is designed to address many needs like food, housing, and healthcare. Most of the programs require able-bodied recipients without children to get a job or else lose benefits. Disability insurance is different in that people can stay on indefinitely once they qualify.
“There’s a serious amount of fraud happening here and we have to be tough about this,” New York University Prof. Lawrence Mead told InsideSources. “Most of these men have work histories, it’s not as if they’ve never worked, and as a result, I don’t think there is a need to create a vast work structure for them. The main thing is to just prevent them from getting on the program.”
Mead adds reforming the disability programs won’t help those that have suffered from long-term poverty. There are many who have no substantial work histories and may come from generations of poverty. Those people could benefit from welfare programs that help them enter the workforce.
Trump could also look specifically at which groups have been leaving the labor force the most. Mead says that men have been dropping out at a more significant rate. He adds past welfare reforms helped slow the rate women were dropping out so future reforms could try to do the same for men.
“First, we are talking about men, and not women,” Mead said. “Women are also withdrawing from the workforce but there was a recent big increase in connection with welfare reform.”
Nevertheless, there is still room for policies that address the decline of women in the workforce. Burtless argues this is one area lawmakers could look to other countries. Sweden, Denmark, France, and others have much more robust programs designed to help woman enter and stay in the workforce.
“We don’t have programs that make work as attractive to women as work is in some of these other countries,” Burtless said. “Even Japan has better, more universal, more generously subsidized daycare for the kids.”
Trump has many options available to him to increase the labor force participation rate. There are still policies, however, that might be worth avoiding. Millsap notes his promise to preserve jobs through trade restrictions might not be the best approach.
“I think a lot of the rhetoric we have been hearing is not going to work,” Millsap said. “There’s been a lot of talk about reducing international trade and trying to bring some of the jobs back that way. I don’t think that’s going to be a huge help. We need to go away from the rhetoric that the government is going to help you.”
There is also the question of how many more people the upcoming administration can actually get back into the workforce. The labor force participation rate is a percentage of the total population so it includes retirees and adult students. Those types of groups tend to have a good reason not to be included in the workforce.
“We haven’t recovered even among prime-age people,” Burtless said. “The age of the population is the single biggest thing that has driven down the participation rate over the last decade but there has been a decline in the participation of prime-age people and we can’t lay that at the feet of the population aging.”
Trump will have the chance to prove whether he can improve the labor market after he is sworn Jan. 20. Republicans were able to maintain congressional control which could prove critical to getting his ideas implemented.