Dr. Daniel Sutter: Alabama Labor Market Participation Issue

The U.S. labor force participation rate has plummeted for two decades, with steep declines during the Great Recession and the COVID-19 pandemic. Alabama’s rate is below the national average, which could cripple our economy.

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

Turnout 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 being last at 55.2%. The variation between states contrasts with the generally small movement in the national rate, less than one percentage point in the seven years before the pandemic.

Alabama’s unemployment rate is 2.6%. Basically, anyone interested in working is working. We would need workers from out of state to fill new jobs to grow our economy if participation does not increase.

Alabama ranks 48th among states in per capita personal income (PCPI), which is closely tied to low work participation. The last six PCPI states all have turnout rates below 58%. The two lowest-income states have the lowest participation rates. A turnout at the national average (at the high-end figure of 69%) would put 200,000 (500,000) more Alabamians in the market, enough to fill current vacancies. The personal income per worker is $120,000, so higher participation could increase the PCPI by 10% or more.

The participation of men aged 25 to 54 highlights the national decline in work. Ninety-eight percent of men ages 25–54 participated in the 1950s compared to 87% in 2021. Alabama’s 85% rate ranks 42nd nationally; prime-age working-age men who remain on the sidelines contribute but are not the sole driver of our participation in the workplace.

Our current participation in the labor market is not necessarily a problem. We all face choices between work and other life activities. People will refuse overtime, leave the corporate ladder, retire early, or stop working for perfectly valid reasons. Each economic statistic aggregates the choices of thousands of individuals. A problem exists if people are not working for fixable reasons or if government policies are pushing people into unemployment.

A high proportion of retirees provides an explanation for the low participation. Population over 65 is correlated with lower work participation in all states. But Alabama ranks only 22nd for the population over 65 at 16.5%. States with a larger older population than Alabama have higher turnout rates, including Florida with the largest population over 65 at 59.5% and Iowa with a slightly older population and a 10 percentage points higher participation (67.7).

Disability provides another possible explanation, as Alabama’s rate exceeds the national average by several percentage points, and disability clearly reduces work participation. But disability is an incomplete explanation. Social Security disability benefits seem to experts too modest to incentivize able-bodied people to choose disability.

Welfare “cliffs” where rising incomes disqualify people for government assistance also affect work participation. Loss of benefits works like high tax rates, and research documents effective tax rates in excess of 100%. Alabama’s bluffs have to be worse than those in other states to explain our low labor force participation. That seems unlikely given Alabama’s low benefit levels for two major forms of assistance, Temporary Assistance for Needy Families and Medicaid.

Perhaps many Alabamians just work off the books. The 1996 bipartisan welfare reform dramatically reduced the number of cases, in part because job requirements identified fraud. Beneficiaries with well-paid jobs would not attend vocational training. Again, Alabama’s informal sector must be larger than that of other states to explain our low voter turnout.

The list of possible explanations is long and includes opioid addiction, childcare, and public transportation. Our attendance deviates from the national average of about 200,000 people, so dozens of factors likely contribute. Whatever the causes, our economic prospects are limited unless more Alabamians decide 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 host of Econversations on TrojanVision. The opinions expressed in this column are those of the author and do not necessarily reflect the views of the University of Troy. The views and opinions expressed here are those of the author and do not necessarily reflect the policy or position of 1819 News. To comment, please send an email with your name and contact information to Comment@1819News.com.

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Michael A. Bynum