Ed Dolan's Econ Blog

Latest Jobs Data Show Employment Ratio Remains Low: Why Legalizing Marijuana Would Help it Recover

The U.S. job numbers for March, released today, show moderate, although not spectacular short-term gains: 120 thousand new payroll jobs, unemployment rate down a notch to 8.2 percent. Long-term indicators are less healthy. In particular, as the chart shows, the employment-population ratio fell by 0.1 percent and remains just a fraction above the all-time low it reached last July. Improving that number will require not just fiscal and monetary stimulus, but structural labor market reform. Legalizing marijuana would be a good start.

What does legalization of marijuana have to do with the employment ratio? More than you might think, and marijuana itself is just the tip of the iceberg. The United States has the highest incarceration rate in the world, something like 750 per 100,000 of population. About two-thirds of those are in federal and state prisons, the rest in local jails. That is forty percent more than Russia, 50 percent more than Cuba, and almost three times as many as Mexico—none of them places we would not like to emulate. It is seven times the rate of France, Italy, or the U.K. and more than twelve times the rate of Japan.

A quarter or more of the U.S. prison population are drug offenders. A Department of Justice study estimates that 21 percent of all federal and state prisoners are “low-level” drug law offenders, that is, people who are not violent and have had minimal or no prior involvement with the criminal justice system.

Technically, incarcerating people does not directly affect the official employment-to-population ratio. That is because the denominator of the ratio is the adult civilian population, which excludes prisoners and active-duty armed forces. However, if we are thinking of the overall strength of the economy, the relevant number would be the ratio of employment to the total adult population, a statistic that the BLS does not include in its standard reports. That ratio would potentially increase by as much as 0.2 percentage points if low-level drug offenders were left in the general population rather than incarcerated. The increase would be 0.7 percent if the overall incarceration rate returned to the level of about 200 per 100,000 that prevailed before it began to rise sharply in the 1980s, a rate that is still double that rate of other countries at similar levels of economic development.

Incarceration rates are not the whole story, however. The labor-market effects of contact with the criminal justice system extend far beyond the 0.75 percent of the population who are currently incarcerated. According to a study from the Center for Economic and Policy Research, there are also as many as  5 million parolees, 6 million ex-prisoners, and altogether, nearly 14 million former felons in the population. The latter include many former felons who paid fines or were sentenced directly to probation without serving time. All of those are at greater or lesser degrees of disadvantage in the labor market. They are often formally barred from occupations that require licenses or working with children. Even where where the law does not restrict their job options, many employers reject ex-felons for positions that involve any degree of responsibility.

Taking all employment effects into account, the CEPR study estimates that the labor market effects of contact with the criminal justice system amount to a 0.8 to 0.9 percentage point decrease in the official employment-to-population ratio. That doesn’t even count the effect of those still in prison and therefore excluded from the adult civilian population.

The CEPR study notes that the labor market effects of felonies are much more severe than those of misdemeanors. That suggests that full legalization of marijuana and other substances would not be necessary to capture much of the labor market benefit of drug law reform. Even the half-measure of reducing possession for personal use to a misdemeanor would have a big impact.

The bottom line: My back-of-the-envelope calculations are that a policy of legalizing marijuana and regulating it like alcohol and tobacco, plus reducing simple possession of other drugs to a misdemeanor, could easily add half a percentage point, maybe more, to the ratio of employment to the total population. Our economy could use a million more workers. If as diverse a trio as Pat Robertson, Eliot Spitzer, and Ron Paul can all agree on something, maybe it’s time to try it.

5 Responses to “Latest Jobs Data Show Employment Ratio Remains Low: Why Legalizing Marijuana Would Help it Recover”

R. CoutinhoApril 8th, 2012 at 8:29 am

I'm lost. How does taking people out of the prisons help to improve the quantity of people employed? It seems that you would simply add more people into the mix who were looking for non-existent jobs.

Ed Dolan EdDolanApril 8th, 2012 at 10:51 am

R Coutinho: Good question. There is a popular view that the number of jobs is fixed, or is determined by forces that are entirely independent of the labor supply. Economists sometimes call it the "Lump of Labor" fallacy. However, the economy doesn't work that way at all. What drives production is the availability of people and their willingness to work. To reduce it to oversimplification, more people willing to work means more production, more income, more spending, more jobs.

If taking people out of the labor force could bring full employment, then we would have had full employment long ago. The employment-population ratio has fallen 5 percentage points since before the recession, so if the number of jobs were constant, the unemployment rate would have fallen; but it has risen. On the other side, during 1970s and 1980s, millions of women entered the labor market, causing the employment-population ratio to rise. If the number of jobs had been fixed the unemployment rate would have soared in proportion to the number of new workers, but it did not; instead, the increased willingness of women to work outside the home helped the economy grow, and the unemployment rate was little affected (after averaging out cyclical ups and downs).

The same mechanism works with prison. If you suck people out of the labor market by putting them in jail, the economy shrinks. If you put them back in the labor force, the increased availability of labor resources lets it grow.

Of course there are some nuances. People who go to jail are on average less educated, so they have lower than average productivity. After spending time in jail, their productivity is even less. So yes, the unemployment rate might go up if you let people out of prison, because the unemployment rate of ex-prisoners is above average. The best thing is not to put them in prison in the first place unless they are violent and a danger to others.

It would take a whole generation after drug legalization (and other criminal justice reforms) for the labor market to normalize. Still, even in the short run, letting people out of prison would help as long as the unemployment rate of ex-prisoner is less than 100 percent.

R. CoutinhoApril 8th, 2012 at 11:31 am

Okay. Now…if we reduced the sentencing labels on those we released (say, for instance, declaring that instead of felonies, they were guilty of misdemeanors) would that also help? I guess what I'm asking is if convicted felons have a higher rate of unemployment than those of misdemeanors?

Finally, if we already have lots of people looking for jobs, would the unemployment rate go down because the former prisoners would be willing to take jobs that those who are looking do not want? I could understand that that could spur the economy some (since the former prisoners would then spend their money, thus creating more jobs). If this is not the dynamic, then I still do not understand how, specifically in an economy where many highly-skilled workers can not find jobs, the extra lookers would increase the GDP.

I do understand that jobs are not limited (per se), but at a given time (such as now) the limits exist in some respects. I suppose another possibility would be that some of the prisoners would be entrepreneurs (hopefully legal ones) who would find a demand niche not currently being met.

Ed Dolan EdDolanApril 8th, 2012 at 4:31 pm

The CEPR paper I referenced indicates that yes, former felons do less well in the job market than those who have committed misdemeanors. Also, they say that prison time itself lowers job market performance for those released from prison, even when you correct for factors like education before imprisonment and decay of job skills while in prison. So the best thing is to keep people out of prison for nonviolent crimes that are not threatening to other people.

I think you are right that part of the dynamic for stimulating the labor market is that former prisoners might take jobs that others would turn down. Even in today's economy, there are, paradoxically, many low-skill jobs that go unfilled. We can't go so far, though, as to say it is helpful to imprison people because it makes them more willing to take low-level jobs; that would be getting things backwards.

A better way to think about the dynamic would be to compare released prisoners entering the job market to young people entering the job market. Where do the jobs come from when a country's population is growing fast? Why weren't unemployment rates higher in the US in decades past when the baby boomers were just entering the labor market? Why don't countries with few young people entering the market automatically have lower unemployment rates? The way I would look at the dynamic is to say that entrepreneurs look around and see an unused resource, idle workers willing to work, so they figure out a way to put them to work. Of course, that means it is also important to keep the labor market friendly to employers by making sure there are not high regulatory barriers to hiring. That is a problem countries like Spain and Italy are struggling with, where youth unemployment is very high.

The bottom line: For a dynamic labor market, don't artificially restrict the supply, and don't artificially restrict the demand, either.

dwbApril 12th, 2012 at 8:25 am

in CA the state spends 9000 per student in college, but 50k annually per prisoner. Now how many of those prisoners were college kids caught for pot? CA would have been better off keeping them in college and adding to the educated workforce. When you factor in that states have been the employment laggards, and that prisoners are expensive and not on payrolls paying taxes, I bet the case is even more dramatic.