The Labor Force Participation Problem

In a single decade, labor force participation in the United States declined from 67.3% in January 2000 to 65.8% in December 2008. Then, under the failed recovery policies of the Democratic Party, it continued to fall through Obama’s presidency, until finally bottoming out at 62.7% and 62.9%, or so the narrative goes.

While it is generally assumed that the decline in labor force participation was a result of the Great Recession, it’s actually clear that the steady loss of workers in the labor force was the fault of the government policy, not just the recession. This becomes clearer when the root cause of the financial crisis is considered.

While the American left would have everyone believe that banks and investors were to blame for the 2006-2008 subprime mortgage crisis and the resulting recession (and they do share some part of the blame), it’s not quite that simple. That borrowers had defaulted on their mortgages had a lot more to do with it.

Remember, it’s because mortgage backed securities became practically worthless that the financial crisis occurred. Eliminate the billions in defaults, and the mortgage backed securities would have retained at least some market value. Instead of an industry wide collapse, there would have been a localized correction.

So why subprime borrowers stopped paying their mortgages, and what does that have to do with the labor force? Both answers require that we look at who these subprime mortgage borrowers were. In short, subprime mortgage borrowers were individuals who would not otherwise be able to qualify for a home loan.

First, these borrowers generally had poor credit scores, indicative of people with poor financial habits. Second, these borrowers were typically poor, and this last point is where the two threads connect. Why is anyone poor? Two words: low income. These households were then impacted by what happened next.

Now, it’s important here that we get our timelines straight. The subprime mortgage crisis began in mid-2006 with a broad decline in home prices. The recession officially started in December of 2007. This later date matters because, just seven months earlier, in May 2007, the Fair Minimum Wage Act of 2007 was passed.

This law increased the federal minimum wage from $5.15 an hour, to $5.85 an hour in July 2007, to $6.55 an hour in July 2008, and, finally, to $7.25 an hour in July 2009. Astute readers will notice this timeline of minimum wage increases coincide perfectly with the months leading up to the recession in December 2007.

It also coincides with a decrease in labor force participation over the same period from a labor force participation rate of 66.4% at the beginning of 2007 to 65.8% at the end of 2008. Coincidence? What segment of workers would be the most likely to be impacted by a change in minimum wage? Low income workers.

Labor force participation declined from 66.4% at the beginning of 2007 to a low of 65.8%, and all it took was congressional Democrats to talk about and then pass the law. After a small recovery from third quarter 2007 through 2008 (in the middle of the recession, notice), labor force participation declines after mid-2008.

So while the causes of the subprime mortgage crisis, the resulting financial crisis, and the recession of 2007-2010 are complicated, the decline in labor force participation isn’t. Making it more expensive to hire a worker diminished the ability of employers to afford low skill and low income workers, so they went without.

When these low income workers lost their jobs, they stopped being able to afford their mortgage payments. While the “irrational exuberance” of investors pushed up the prices of homes beyond any responsible market valuation, it was millions of unemployed borrowers, not greedy investors, that broke the banks.

Meanwhile, the labor market has yet to fully recover from the financial crisis for reasons that have nothing to do with the financial crisis, and this only demonstrates that the financial crisis itself, as well as the decline in labor force participation are both symptoms of a larger problem: government interference.

Until the minimum wage rate is reduced to a sustainable level, where it is no longer prohibitive to employment or a factor in cost push inflation, we’ll continue to see poor labor force participation and an economy that remains perpetually dependent on stimulative fiscal policy simply to function.


Liberty is For The Win!

 

 

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