The latest jobs report was dismal. Only 194,000 people were newly employed last month, well below the 500,000 that analysts were predicting.
There are 5 million fewer people employed today than before the Covid epidemic struck and 7.7 million are officially counted as unemployed. Another 6 million say they want a job, but are not counted as unemployed because they are not actively seeking work.
Yet job openings are at a record high, and employers around the country report having a hard time filling positions, even after offering higher pay.
So, what’s wrong with the labor market?
Fear of Covid may be one problem. But federal policies that punish work and reward nonwork are likely to be more important – certainly in the long run.
Our fiscal system affects the choice to work in two ways. Income and payroll taxes reduce worker take-home pay and more than thirty federal entitlement programs reduce benefits as family income rises.
Because of the complexity of the entitlement programs – both in their own right and through their interaction with each other – determining their incentive effects is a monumental research task. Plus, the incentive effects are not limited to the current period. Money we earn today affects Social Security, health care and other benefits in the years of our retirement.
Fortunately, Boston University professor Lawrence Kotlikoff and his colleagues have taken on this Herculean challenge and calculated the lifetime incentive effects of all the tax and entitlement programs for families at different ages and income levels.
The results are sobering. The study finds that workers in their 20s who are in the bottom fifth of the income distribution stand to lose $770 in taxes and reduced benefits if they earn an additional $1,000 of income. (See the study’s Table 2 on p. 19.) That’s a 77% net marginal tax rate and it is higher than for any other income group. (The top 1%, for example, faces a net marginal tax rate of 44.5%.)
Even middle-income families face very high penalties for working. Workers in their 20s who are in the third quintile of income distribution, for example, lose $406 if they earn an additional $1,000 of income.
Note: these numbers are only averages. For some families, things can be much worse. The study finds that someone in their 20s in the bottom fifth of the income distribution can lose as much as $20,996 in entitlement benefits by earning $1,000 more income.
Kotlikoff gives the example of a single mother living in Oregon with three children and earning $37,157 a year. She qualifies for such annual benefits as food stamps ($1,334), Section 8 housing vouchers ($15,015), Obamacare subsidies ($11,372) and other benefits. If she earns $1,000 more, she will violate the Section 8 housing requirement to maintain continuous eligibility. That will cost her a lifetime of housing support with a present value of $184,456!
In another example, a father of four in Wyoming earns $57,432 per year. He receives $23,921 in annual childcare support and a $40,337 Obamacare subsidy. Additional earnings of $1,000 would cause the loss of his entire childcare subsidy, which, extended over future years, has a present value of $149,197.
In a third example, a retired Alaskan couple receives Supplemental Security Income (SSI), which in Alaska automatically qualifies them for adult Medicaid. An additional $1,000 of earnings, however, would cause the couple to lose their eligibility for SSI and Medicaid, with a present value of $39,539.
If Democrats in Congress have their way, these incentive effects will get much worse. Take the newly proposed Child Tax Credit (CTC), which would increase the maximum benefits to $3,000 or $3,600 per child (up from $2,000). Whereas the current system has pro-work incentives, the new proposal would make the full credit available to all low- and middle-income families regardless of earnings or income.
A new study finds that if families don’t change their work behavior, the expansion of the CTC would reduce child poverty by 34% and deep child poverty by 39%. However, based on behavioral responses reported in the academic literature, families will change their behavior. The authors estimate that this change in policy would lead 1.5 million workers (constituting 2.6% of all working parents) to exit the labor force. The decline in employment and the consequent earnings loss would mean that child poverty would only fall by 22% and deep child poverty would not fall at all.
University of Chicago economist Casey Mulligan is probably one of the few people who has read all 2,400 pages of the Democrat’s reconciliation bill. He writes:
“The implicit employment and income taxes in [the bill] would increase marginal tax rates on work by about 7 percentage points. I expect that such a change in the disincentive would reduce full-time equivalent employment by about 4.5%, or about 7 million jobs.’
Economics teaches that incentives matter. The more perverse the incentives, the more perverse the results.