But structural changes are plainly at work too, based in part on slower-moving demographic factors. A 2012 study by economists at the Federal Reserve Bank of Chicago estimated that about one-quarter of the decline in labor-force participation since the start of the Great Recession can be traced to retirements. Other economists have attributed about half of the drop to the aging of baby boomers. Baby boomers can't be the whole story, though, since the participation rate has declined for younger workers too. This part of the drop is a function of various factors, including simple discouragement, poor work incentives created by public policies, inadequate schooling and training, and a greater propensity to seek disability insurance.Dean Baker does the needed clean-up on this canard:
Hubbard noted the sharp fall in labor force participation since the downturn. He attributed it to a lack of incentive for people to work. This is in striking contrast to the more obvious logic, that when people have been trying unsuccessfully to find jobs for 6 months or a year, they eventually give up ... The problem with Hubbard's story is that he doesn't have a good explanation for why people suddenly decided that they didn't want to work. He points to an increase in the length of unemployment benefits, but this happens in every downturn. Furthermore, the maximum duration of benefits has been cut back sharply from its peak of 99 weeks in the first years of the recession with no corresponding surge in employment. The Affordable Care Act will make it possible for many people to get health care insurance without working or without working full time, but that should only have begun affecting the data in the last few months as the health care exchanges came into existence. It would not explain the drop in labor force participation that was already quite evident by the summer of last year.Dean discusses other reasons why Hubbard’s inward shift of the labor supply curve story does not fit the data. Let me simply add that if it were a lack of labor supply (as opposed to weak aggregate demand) to blame here, then why haven’t real wages increased? Hubbard does note aggregate demand factors:
Does this mean that the Obama administration's "targeted, timely and temporary" stimulus package was the right approach? Actually, no. Increasingly, it appears to have been a poor match for the severity of the downturn and the magnitude of the required boost. After the Great Recession's sharp decline in investment and employment, U.S. business probably needed a more curative jolt to restore confidence. A sustained infrastructure program, rather than a temporary one for "shovel-ready" projects, would have provided more reassurance of longer-term demand. And far-reaching tax reform could have provided both a near-term fillip from front-loaded business tax cuts and a credible prospect for future growth. What we don't know is whether the Obama's administration's activist policies failed to draw more Americans back to work because they were poorly executed or because they didn't do enough to raise aggregate demand. A better designed activist fiscal policy would have made more headway in encouraging growth, but deeper factors behind the downward shift in labor force participation still remain.Why does this remind me of Romney’s 2012 campaign? Let’s be clear – Christina Romer pushed for a better designed fiscal stimulus back in 2009 with more in the way of government investment spending. And her call for a more sensible fiscal stimulus got zero support from Glenn Hubbard’s side in 2009. No – they pushed for low bang for the buck tax cuts without a clue as to how to pay for them in the long-run. I would hope Jeb Bush – if he does decide to seek the Republican nomination – could do better than Mitt Romney did in his 2012 Presidential campaign. And if he were to become the next President, let’s all hope that his economic policies are not as ill thought out as the economic policies enacted by his brother.