Disincentives to Work Have Slowed U.S. Economic Growth

The 21st century has not been kind to the U.S. economy: the annual rate of GDP growth for the past 12 years, once all the data are available, probably will prove to be about half the 3.5 percent annual rate the country enjoyed from its founding to the late 20th century.

One key factor behind this trend—at least in recent years—is the shrinking percentage of workers in the U.S. economy, according to economist Richard Vedder. A senior fellow at the Independent Institute, Vedder makes his case in an op-ed that appears in today’s Wall Street Journal.

In 2000, there were eight more workers for every 100 working-age Americans than there were in 1960, but since 2000, more than two-thirds of that increase has been erased. If the proportion of workers hadn’t fallen, the U.S. economy would have been growing probably at least 2.2 percent each year this century instead of 1.81 percent.

Vedder attributes the main cause of the trend to public policies that have reduced the incentive to work—especially changes in four particular federal programs:

• A sharp rise in food stamps. From 2000 to 2007, the number of Americans getting food stamps grew from 17.1 million to 26.3 million. Although the unemployment rate fell from 2010 to October 2012 (the latest month for which food-stamp data are available), the number of food-stamp recipients rose by 7,223,000—about 10,000 a day.
• A steady increase in Social Security disability payments. The number of Americans who received work-related disability checks from Social Security was about 3 million in 1990. It was about 5 million in 2000, 6.5 million in 2005, and is 8.6 million today.
• A significant boost in Pell Grant recipients. In 2000, fewer than 3.9 million young Americans were awarded Pell Grants to attend college. That number rose by nearly 6 million by 2011. This increase is hard to justify on economic grounds, according to Vedder, because “nearly half of four-year college graduates today work in jobs that the Labor Department has determined do not require a college degree,” he writes.
• Extended unemployment benefits. Unemployment benefits traditionally lasted up to 26 weeks, but that period has been increased over the past four years. Some recipients have received unemployment benefits for more than a year, which has weakened the incentive of the unemployed to take jobs outside of their comfort zone.

Vedder, who co-authored the award-winning book Out of Work: Unemployment and Government Policy in Twentieth-Century America, hastens to add that other factors have also dampened U.S. economic growth. He also notes that policymakers could adopt a variety of productive measures to increase employment—such as adopting a more worker-oriented immigration policy and cutting taxes on work-related income.

“Most American recognize the need to reduce government spending to rein in the national debt,” Vedder writes. “But there is another reason to cut government spending for specific programs: If more people have less incentive to stay out of the work force, they might seek jobs and help spur economic growth.”