As Americans celebrated the Labor Day weekend, nearly 94 million people of working age actually had nothing to celebrate. Thats because they arent in the labor force. Theyre not working and theyre not looking for a job. The latest Bureau of Labor Statistics reports that the labor force participation rate is now 62.6 percent, a 38 year low.
Why is that? The generosity of welfare benefits must surely be one of the reasons. A 2013 Cato Institute study by Michael Tanner and Charles Hughes found that a mother with two children participating in seven common welfare programs would enjoy more income than what she would earn from a minimum-wage job in 35 states, even after accounting for the Earned Income Tax Credit and Child Tax Credit. In Connecticut, Hawaii, Massachusetts, New Jersey, New York, Rhode Island, Vermont, and the District of Columbia, welfare pays more than a $20-an-hour job. In five additional states, it yields more than a $15-an-hour job.
These results are confirmed by other work. A Congressional Budget Office study, looking at Pennsylvania, found that the loss of benefits creates very high marginal tax rates, discouraging labor-force entry and work hours. The report found that an adult with one child faced a marginal tax rate of 47 percent for taking a job paying the minimum wage in 2012. They faced a marginal tax rate of 95 percent once their earnings disqualified them from Medicaid.