Walk it off: Reform disability payments to grow the economy

Back in 2015, GOP frontrunner Donald Trump called into the CBS show, “Face the Nation,” and claimed that Americans are living in a “false economy”, where the unemployment rate is actually 40 percent, rather than the 5 percent figure reported by the Department of Labor.

When we analyze the employment statistics using the broadest definition of unemployment, the proportion of people aged 16-and-older not in full-time jobs actually does stand at around 40 percent of the population. After almost two decades of decline, the U.S. labor force participation rate, the proportion of civilians (aged 16+) either employed or actively looking for work currently stands at a mere 63 percent.

{mosads}Last year, I wrote an article on why increasing labor force participation was critical to achieving robust economic growth. In this article, I examine the reasons behind this trend of increased idleness and what this tells us about work opportunities and incentives.

Labor force participation can decline for both good and bad reasons. When taking into account rising school enrollment among 18-24 year olds, the downward trend in labor force participation among young adults starts to look less problematic. There is also a driving force at the opposite end of the demographic spectrum, with baby boomers dropping out of the workforce and entering retirement.

However, when we isolate a large portion of the population, we begin to identify the bad incentives at play in this increasing trend of idleness. Among men of prime working age (25 to 54), nearly all of the decline in labor force participation is attributable to a rise in the number of people who say they do not want a job.

Furthermore, one in three of these prime age dropouts can be accounted for by an increase in men who claim to be either sick or disabled. Far from any indication of a prime age sickness epidemic, this group’s health status has actually not deteriorated over time, and evidence suggests that federal disability programs are actually encouraging men who are able to work to drop out of the labor force.

Using data from the Bureau of Labor Statistics covering a 22-year period, we can deduce that, from 1994-2016, around 30-40 percent of non-retired, non-disabled men, not in the workforce were not open to, or interested in taking a job.

Additionally, Current Population Service data from 1996-2012 reveals that around half of men not in the workforce blamed a disability for their idleness. This is significantly higher than those who said that they were in school (13 percent), retired (10 percent), or keeping house (13 percent).

The pattern of out of work men reporting a disability roughly follows trends in the number of working-age men receiving Social Security Disability Insurance (SSDI) benefits. The Social Security Disability Insurance Program has seen a drastic increase in beneficiaries in recent years, with less than 2 million beneficiaries claiming SSDI in 1970 and more than 10 million beneficiaries in 2015.

Deep recessions such a 1974-75 and 2008-09 also increased SSDI receipt, demonstrating how “ability to work” could diminish not just because of a worker’s health, but because of the health of the economy.

An applicant’s eligibility for SSDI is determined using a grid of medical vocational rules. These guidelines apply much looser standards for applicant’s eligibility and are an important part of the explanation for increased disability.

On close inspection, our declining labor force participation problems start to look more like supply-side issues than insufficient labor demand. Policymakers should focus on reforming safety net programs that create perverse incentives and obstruct opportunity.

Ultimately, SSDI guidelines should be eliminated and replaced with a fairer, simpler and more uniform system for determining eligibility.

While such reforms would help remedy the United States’ underlying problem of labor force inactivity, they only address the tip of the iceberg. Labor market reforms that induce employment over welfare and create opportunities for the young and unskilled are also essential to grow the labor force.

Jack Salmon is a Washington, D.C.-based researcher focused on federal fiscal policy. Salmon holds an M.A. in political economy with specializations in macroeconomics and comparative economic analysis from King’s College London. 

The views expressed by contributors are their own and not the views of The Hill.