Dr. Daniel Sutter: Alabama’s Labor Force Participation Problem

The U.S. labor force participation rate has been declining for two decades, with big drops during the Great Recession and the COVID-19 pandemic. Alabama’s rate lags behind the national average, potentially putting our economy at risk.

Labor force participation includes either working or actively looking for work (definition of unemployment) and is scaled by population age 16 and over. Alabama’s August rate was 57.2%, compared to a national rate of 62.4.

Participation rates vary widely from state to state. Three states topped 69%, led by Nebraska at 69.9. At the other end, two states were below 56%, with West Virginia last at 55.2%. The differences between states contrast with generally little movement nationally, less than one percentage point in the seven years before the pandemic.

Alabama’s unemployment rate is 2.6%. Basically, everyone who is interested in working works. If participation does not increase, we would need foreign workers to fill new jobs to grow our economy.

Alabama ranks 48th among states in per capita personal income (PCPI), which is closely related to low labor force participation. The bottom six states in the PCPI all have participation rates below 58%. The two lowest income states have the lowest participation rates. A participation rate at the national average (at the top 69% figure) would put 200,000 (500,000) more Alabamians into the market, enough to fill the currently open positions. Personal income per worker is $120,000, so higher participation could increase PCPI by 10% or more.

The participation of men aged 25 to 54 highlights the nationwide decline in the workforce. Ninety-eight percent of men ages 25-54 participated in the 1950s, up from 87% in 2021. Alabama’s 85% rate ranks 42nd nationally; prime working-age men sitting on the fringes contribute but are not the only engine of our labor force participation.

Our current labor force participation is not necessarily a problem. We all face a choice between work and other life activities. People refuse overtime, drop down the corporate ladder, take early retirement, or stop working for perfectly healthy reasons. Each economic statistic collects a sample of thousands of individuals. The problem arises when people are not working for correctable reasons, or when government policies push people out of work.

One of the explanations for low participation is the high proportion of pensioners. The over-65 population correlates with lower labor force participation rates across states. But Alabama is only 22nd in population over 65 at 16.5%. States with larger older populations than Alabama have higher participation rates, including Florida with the largest population over 65 at 59.5% and Iowa with a slightly older population and 10 percentage points higher participation (67.7).

Another possible explanation is disability, as Alabama’s rate exceeds the national average by several percentage points and disability clearly reduces labor participation. But disability is an incomplete explanation. Social Security disability benefits appear to experts to be too meager to induce able-bodied individuals to choose disability.

Social “cliffs,” where increased earnings disqualify people for government assistance, also affect labor force participation. The loss of benefits works like high tax rates, and research documents effective tax rates higher than 100%. Alabama reefs must be worse than other states to explain our low labor participation rate. That seems unlikely given Alabama’s low level of benefits for the two main forms of aid, Temporary Assistance for Needy Families and Medicaid.

Perhaps many Alabamians simply work by the books. Bipartisan welfare reform in 1996 dramatically reduced the number of cases in part because work requirements exposed fraud. Beneficiaries with well-paying jobs would not attend job training. Again, Alabama’s informal sector must be larger than other states to explain our low participation rate.

The list of possible explanations goes on and includes opioid addiction, child care, and public transportation. Our turnout deviates from the national average by about 200,000 people, so dozens of factors probably contribute. Regardless of the causes, our economic prospects are limited unless more Alabamians choose to work.

Daniel Sutter is the Charles G. Koch Professor of Economics at the Manuel H. Johnson Center for Political Economy at Troy University and a TrojanVision talk host. The views expressed in this column are those of the author and do not necessarily reflect those of Troy University. The views and opinions expressed here are those of the author and do not necessarily reflect the policy or position of 1819 News. To add a comment, send an email with your name and contact information to [email protected].

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