Labor force participation rates and status considerations

From Links to Consider 12/15 by Arnold Kling.

Pinghui Wu writes,

Labor force exit rates decline with a worker group’s expected earnings but increase with their reference earnings, defined as the average earnings in a state across all prime-age workers. Compared with a 10 percent increase in expected earnings, a 10 percent increase in reference earnings has the same sized but opposite effect on the labor force exit rate, suggesting that workers discount their own expected earnings by their peers’ earnings.

If lower wages for me make me want to quit working, that could be ordinary labor supply elasticity. But if higher wages for you make me want to quit working? That sounds like status loss, which is the author’s point. So if Richard Reeves thinks that men can be encouraged to work in low-status jobs in the health sector, he needs to think again.

Not saying that either (or both) Wu and Kling are correct, though quite possibly they are.  The interesting point to me is how slow we are to engage with the complexity of complex systems.  

To a first order degree, the principles of supply and demand and price are usefully true.   But in complex, evolving, kinetic, chaotic, multi-systems which are loosely coupled (such as income and status), it is not quite so straight-forward as it first appears in the classroom.  

A nation clearly has an interest in the creation of opportunities for its citizens.  It also has an interest, though not direct authority, in labor force participation rate. 

Government has the capacity to influence labor force participation rate (and incomes) by controlling inflation (strengthens nominal wage), lowering personal taxes (increase income), decreasing labor supply (controlling immigration), and providing the basic elements for economic growth (increased job choice.)  

If the government floods the market with cheap illegal labor, erodes purchasing power through inflation, reduces income by increasing taxes, and discourages business formation and growth, then those at the margins of the labor force have ever less incentive to participate.  That is where we seem to be now.

And that is just first order traditional economics.  

What if Wu is correct, that status erosion also influence labor force participation rate?  What are the policies and tools which might be employed to influence that equation?  

We have actually been down that path in the early part of the last century with a focus on a living wage, predicated on wages needing to be at a level that would support a fully employed husband, a part-time employed wife and children.  Certainly there was an economic, poverty and social security aspect to this policy framework.  But unintentionally, it creates status incentives.  A male being seen to support a wife and children had a distinct and respectable status in the community and the living wage focus reinforced that.  

In the 1960s, for various reasons we moved away from that model and atomized the focal point on to individuals rather than families.  Optimum income for individuals in the market rather than living wages for families.  

Whether you deem living wages for men with families an appropriate public and economic policy, it illustrates the challenges of government taking actions to affect, effectively, status.

Were Wu's hypothesis to be true, then it is going to force some very interesting but challenging public policy discussions.  

But as we have seen with unrestricted immigration flooding the labor market and rapidly rising fentanyl drug overdose deaths, our public policy institutions are well practiced at avoiding examining deeply consequential policies which are harming the public.