Tuesday, October 8, 2013

Labor Force Shrinking, Disability Claims Rising

In the early 1980s the distressing persistence of high unemployment in Europe was labeled "Eurosclerosis." Some now wonder whether "Amerisclerosis" is the right word to describe America's labor market. It is true that unemployment has slowly dropped from a peak of 10 percent in late 2009 to 7.3 percent at present. But this decline overstates the health of the jobs market, says The Economist.
  • The labor force participation rate, the share of the working-age population either working or looking for work, has plunged from 66 percent in 2007 to 63.2 percent in August, a 35-year low.
  • Participation rates have declined sharply for "prime-age" men and women between ages 25 and 54, and risen slightly for those ages 55 and over.
More generous unemployment benefits tend to elevate participation rates since workers must be looking for work to qualify. With disability insurance (DI), however, the opposite applies: to qualify applicants must generally demonstrate that they cannot work. In theory, disability and unemployment should not be correlated -- and from 1966 to 1985 they were not.

But in 1984 DI eligibility criteria were eased so that applicants could qualify based on a combination of conditions rather than just one. Since then, highly subjective conditions such as back pain and mental illness have grown to account for most DI beneficiaries, and claims have become more correlated with unemployment.
  • That strongly suggests that many workers find a way to qualify for DI when other benefits have been exhausted.
  • Between 2007 and 2012 the number of applicants for DI shot up from 11.2 per 1,000 working-age people to 14.
  • Unpublished research by Mary Daly of the San Francisco Federal Reserve, estimates that this rise in applications equates to 2.6 million people.
Europe may have useful lessons here. In the 1970s DI became more generous in the Netherlands and caseloads exploded. Had the increase in disability numbers shown up in unemployment instead, the Dutch unemployment rate, which was 6 percent in 1980, would have been 13.4 percent. The crushing expense of DI eventually forced the Dutch government to make reforms about a decade ago, primarily by making employers bear more of the expense of employees who end up on the system. Since then, caseloads have dropped. America, whose DI trust fund is expected to run dry in 2016 based on current trends, should show similar resolve.

Source: "The Missing Millions," The Economist, September 28, 2013, summarized by National Center for Policy Analysis.