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New Employment Data May Give Clues to Why Recovery Is Stuck in First Gear

The good news for workers is that the labor market is growing and the economy shows signs of improvement. The unemployment rate is down to 5.9 percent and payroll employment increased by 248,000 new jobs in September. But this good news comes with some caveats: Wages are stagnant, a 36 year-old record has been broken by the 62.7 percent labor force participation rate (a new low), and the employment-to-population ratio for 25-54 year olds actually fell from 76.8 to 76.7 in September. Taken together, these findings are troubling and reinforce the perception that the recovery is mostly smoke and mirrors. Why? Because one of the explanations for such a mass exodus of workers is retiring Baby Boomers. But if the economy was in a full recovery, those retiring Baby Boomers would be replaced by 25-54 year old workers. Instead, as labor analyst James Sherk points out, the data actually show that the employment-to-population ratio for that cohort declined last month. Even more troubling, the total employment-to-population rate has remained flat for four consecutive months. While I certainly don’t claim to know all the reasons why this recovery is so weak, I can think of some possible explanations. The potential for wage increases from an improving economy can be cancelled out by growth-stifling unionization, as the High Cost of Big Labor series from the Competitive Enterprise Institute showed. Wage increases are stifled in many states due to artificially high labor costs from heavy unionization (real wage increases comes from the ability of companies to increase their output by lowering their marginal costs, not from demands for higher wages without the increased productivity to support that higher cost of labor). The income loss per person from forced unionism is a median of $3,278, or over $13,100 for a family of four. Total annual estimated income loss nationally was $647.8 billion in 2012. I’m also willing to bet that one of the reasons that the employment-to-population rate isn’t increasing is because federal regulations in the form of barrier-to-entry licensing requirements discourage the creation of new start-ups. As the Institute for Justice points out, only one in 20 U.S. workers needed the government’s permission to pursue an occupation of their choice in the 1950s. Now almost one in three workers must obtain a license before they pursue an occupation. That study finds that,

In documenting the license requirements for 102 occupations nationwide, this report finds that these laws can pose substantial barriers for those seeking work, particularly those most likely to aspire to these occupations—minorities, those of lesser means and those with less education. Moreover, about half the occupations studied offer the possibility of entrepreneurship, suggesting that these laws hinder both job attainment and creation.

In fact, the regulatory state has grown so much since the 1950s that it’s GDP (extracted from an annual $1.8 trillion in compliance costs from businesses) is as large as Canada’s. And yes, that growth is at the expense of the private sector because firms with fewer than 20 employees have to pay $10,585 in per-employee regulatory costs, whereas firms with more than 500 employees pay only $7,755. That finding should discourage anyone from saying that federal regulations add net benefits. It’s obvious that the bloated federal regulatory state discourages the creation of new businesses, unfairly burdens existing small businesses, and, as the late Nobel laureate economist Ronald Coase pointed out, doesn’t necessarily stop firms from erring in the first place. So it’s no wonder why the employment-to-population rate is stagnant. And with sworn enemies of the free market like economists Paul Krugman and Martin Wolf being hailed as “the world's most influential economic commentators,” it’s not all that surprising that the regulatory state is still hailed as the savior of Western civilization. Come to think of it, with Krugman and Wolf at the helm, it’s no wonder why our departure from the gospel-truth economics of Adam Smith and Friedrich Hayek has landed us in a place where the discipline itself is in chaos and prominent journalists are openly saying that, “…economics is in disarray.” But this is much more than an intellectual debate. Getting back to an understanding of basic economic principles is the difference between a robust recovery and a recovery stuck on life support. And if we really want to give American workers a long overdue raise, we should, at the very least, take measures to curb heavy unionization by passing right to work laws which prohibit unions from requiring all incoming workers to pay them in order to be employed. American workers must realize that increased unionization of the workforce and the growth of the federal regulatory state come at the expense of us all. If you still think that regulations and labor unions always provide tangible benefits to society, click here to read about a runner-up for the world’s silliest regulation, and here to read about the world’s worst union.