Earlier this year, the Congressional Budget Office revised down its estimate of potential U.S. economic output. In small part, the CBO blamed the recession. But mostly the revision rested on trends already in place before 2007, trends we noticed only when the world went pear-shaped. The single largest of these, the CBO said, is a decline in workforce participation. That is, more people are working either fewer hours or not at all.
This is not about demographics or a skills mismatch, but choice. People are choosing to work less. And since an economy can produce only as much as the available labor supply will allow, less labor means less economic growth. Hence the CBO’s revision. This is tough news, sitting as we all do in the midst of an agreement among journalists, corporations, and politicians of both parties that economic growth is a good thing.
In a speech this week, Naryana Kocherlakota, head of the Minneapolis Fed, pointed out that it may be a good thing, and it may be a bad thing. He referred to a recent paper (pdf) by Robert Hall of Stanford that looked in great detail at the permanent effects of the recession. Hall found, as a long-term consequence, a 5 percent shortfall in business capital and a 2.5 percent drop in labor force participation. Kocherlakota answers that we can choose to change these things, but it’s entirely up to us.
“Is the the United States willing to pay the costs required to generate that materially higher path for economic activity? … As a society, we can only increase labor input by forgoing leisure and home production. And as a society, we can only increase investment by increasing labor input or by reducing consumption. Hence, I see the following as the key policy question: Is the United States, as a society, willing to forgo the leisure, home production, and/or near-term consumption required to generate materially higher future economic activity?”
The tradeoff between leisure and work is clear. Work less, watch more TV. And according to recent work (pdf) by Mark Aguiar of Princeton University and two more authors at the University of Chicago’s Booth School of Business, in a normal recession, about half of the time spent not working ends up going to leisure, most of it—in fact—to TV and sleep.
About 30 percent of that time goes into what economists call “home production”—making your own dinner, caring for your own children, and fixing your own kitchen sink. Aguiar’s data come from time studies conducted before the recession. The paper extends the data to unemployment conditions during the recession, under the assumption that fluctuations in leisure and home production are consistent across recessions. The paper treats home production as a function, not a choice: When a recession ends, and higher-paying work is available to us, we’ll gladly pay someone else to make dinner.
Although it’s not the main argument in his speech, Kocherlakota is suggesting that home production, like leisure, is a choice. It’s something we might willingly choose to do more of, even if high-paying work is available. The trend toward lower workforce participation predates the recession, which suggests that he’s right. Making our own dinner, caring for our own children: these things have value for us, just like sleeping and watching TV. We might choose to do them even when there’s higher-paying work available.
Or: I enjoy making dinner. Sometimes I fantasize about doing it every day, instead of commuting home from Manhattan to Long Island. Perhaps Naryana Kocherlakota feels the same way. Maybe a lot of people do.