Surprised by positive economic reports at the start of the year, economists have spent the past month praising Biden’s strong economy, in particular the robust labor market. But it’s too soon to celebrate. 

In January, strong labor data surpassed expectations as unemployment remained at 3.7 percent, and the economy added 353,000 jobs to the market -- well over double the expected increase. Before championing Biden’s labor market, however, it’s important to understand how economists calculate these numbers: The highly reported unemployment rate is determined by taking the number of unemployed people and dividing it by the lesser-reported figure of labor force participation. The same report showed that the labor force participation rate has declined by three-tenths of a percent, artificially lowering unemployment. These surprising numbers should beg the question: Why is labor force participation in decline?

While the pandemic is often blamed for current labor supply and demand imbalances, the labor force has largely returned to pre-pandemic levels. However, one constant since the pandemic -- bloated fiscal policies from Capitol Hill -- continues to discourage workforce participation. 

Historically, there has been a strong correlation between labor force participation and federal spending. Using quarterly data from the past seventy years and adjusting for inflation and population changes, a trendline emerges showing that the labor force participation rate in America can be maximized at over 67 percent when real federal expenditures are under $5,300 per person.

This relationship between federal expenditures and labor force participation is related to the economic concept of diminishing marginal returns. Initially, as federal expenditures per capita rise, there is indeed a noticeable increase in labor force participation, reflecting the expected outcome of government investment in job creation and opportunity generation. 

However, this positive effect is not perpetual. As federal expenditures increase beyond $5,300 per person, we can observe a gradual decline in labor force participation, likely indicative of excessive government intervention. This implies that, at $5,300 per person, federal spending ceases to be effective in bolstering employment, but rather discourages individuals from going to work.

Current spending levels are over $23,000 per person, and the labor force participation rate currently sits at just 62.5 percent, a tenth of a percent under what the historical trend would predict and eight-tenths below the pre-pandemic rate of 63.3 percent. While a rate change of eight-tenths of a percent may not seem substantial, it translates to over 2.1 million fewer Americans in the labor force now than would have been at pre-pandemic rates.

Unfortunately, it appears that neither party has any desire to rectify this concern as House Speaker Mike Johnson and Senate Majority Leader Chuck Schumer have already agreed to spend $1.7 trillion on discretionary programs this fiscal year. Yet, while politicians bicker over the budget, the national debt has surpassed $34.3 trillion and the country is running a yearly national deficit equivalent to approximately six percent of gross domestic product. This is extremely concerning due to the fact that this spending level has become a permanent part of the budget, rather than just a temporary fluctuation.

Although government spending cannot explain the entirety of over two million Americans absent from the labor force, it has unquestionably helped the Biden administration to tout an unemployment rate of under four percent for the past two years. 

Government efforts toward education, training, and employment services are apparently failing to drive individuals into the labor force as well. This is especially worrisome for the 20-24 demographic entering the workforce for the first time. Yearly data from the Office of Management and Budget shows that the labor force participation rate of this group is negatively affected by higher spending on education and employment services. 

Unless federal officials prioritize lowering spending and cutting the deficit, Gen Z and millions of other Americans will continue to exit the job market, leaving the economy propped up by a labor market with only a veneer of strength and a federal government too caught up in spending money it does not have to waste.

Daniel Elmore is a Young Voices contributor studying economics at Lenoir-Rhyne University. His commentary has appeared in the Washington Examiner, Carolina Journal, and DC Journal. Follow him on X (formerly Twitter): @daniel_j_elmore

Images: Bureau of Labor Statistics