Opioids could be key to understanding America’s inflation risk

Down and out of the workforce.
Down and out of the workforce.
Image: Reuters/Brian Snyder
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Donald Trump just signed a bill to combat America’s staggering opioid crisis. The law beefs up addiction treatment, education, and policing of illicit drug flows.

The funding is desperately needed. Opioid overdoses are currently killing nearly 6,000 people every month; death and addiction have ravaged communities around the country.

But the crisis might also be behind one of the biggest puzzles of the US economy: Even though wages are rising and jobs abound, nearly three in every eight American adults aren’t working—or even looking for work. Opioids might be to blame.

First, though, a little context behind this mystery. Things have obviously changed lots since the great recession, when 9.9% of American workers were jobless. The US economy is firing on all cylinders, and the unemployment rate shows it. Last month, it slipped to 3.7%—the lowest rate since 1969.

The ultra-low unemployment rate tells us that anyone who wants a job can find one pretty easily. However, this statistic only includes people who are consider to be in the workforce (meaning, they either have a job or are actively looking for one). A broader measure of labor force health is the labor force participation rate, the share of adults who are either employed or actively looking for work. And it hints at something very different.

Unlike the unemployment rate, the labor force participation rate has barely budged. For the last five years, it’s hovered just under 63%—around where it was in 1977, when fewer than half of all women worked. (And this isn’t just a baby boomer retirement story. Even when looking at what economists call prime-age workers—those between the ages of 25 and 54, old enough that most are done with school but too young to retire—participation is still way below where it was in the past three expansions.)

How do you square the fantastic unemployment rate with stubbornly low labor force participation rate?

One theory is that a percentage of the potential workforce, on the sidelines since the recession, is just waiting for the right incentives to rejoin. When you’ve been out of the workforce for a while, launching a job search is big change. It demands time, money, grit, and a huge juggling of priorities. Jobs have to be attractive, well-paying, and accessible enough to get people over all those humps.

Then again, what if it’s not so much America’s workforce structure that’s changed as the lives of its people? Could it be that the huge number of out-of-the-workforce adults simply aren’t going to—or can’t—take new jobs, no matter how plum or well-paying?

It could be if you take opioids into account, argues Ian Shepherdson, chief economist at UK-based Pantheon Macroeconomics.

“Apart from the hideous human cost to addicts, their families and communities, the surge in drug deaths tells us that the number of people who are outside the labor force as a result of their opioid use probably has risen sharply,” he writes in a recent note, noting that the sharpest rise in deaths is among prime-aged Americans.

The toll of opioids on the labor force was first brought to national attention by economists Anne Case and Angus Deaton, in their research on what they call “deaths of despair.” It also bears mentioning that drug users of all sorts also face formal barriers to employment like employer drug testing. Take, for instance, this Youngstown, Ohio, manufacturing plant that says at least a quarter of its job applicants fail drug tests (paywall).

By Shepherdson’s calculations, some 1.4 million working-age people are now addicted to opioids. Add those people back into the workforce and, all else equal, both the unemployment rate and the labor force participation rate would climb closer to more historically normal levels.

This brings us to one of the big economic questions of the moment: whether the Federal Reserve is raising rates too aggressively—a matter so hotly debated that Trump has broken with presidential norms repeatedly to weigh in. (The Fed’s September hike was its eighth consecutive since 2015.) A major Fed fear is that the crazy-low unemployment rate will force companies to increase wages and, as a result, raise prices. That, in turn, will lead to spiraling inflation that hurts the economy.

On the other side of the argument are economists who see the flat labor-force participation rate and relatively sluggish real wage growth as signs that the economy has more to room yet to grow before inflation becomes a genuine worry. According to this logic, the risks the come with rate hikes—i.e. the chance that higher borrowing costs will trigger the next recession—outweigh the benefits.

Shepherdson’s analysis offers clear support for the former. If millions of people addicted to opioids won’t join the workforce no matter how fast US GDP grows, then the job market is indeed tight.

“At 3.7% and falling, [the unempl0yment rate] signals a very real risk of a sudden surge in the scarcity premium component of wage growth,” writes Shepherdson.

Mind you, Shepherdson bases his calculations on what he calls the “extreme assumption” that all opioid addicts have left the workforce. And indeed, economists still have only a hazy sense of how opioid prescription and addiction relates to workforce attrition. On the other hand, some experts estimate the true number of addicts to be much bigger than Shepherdson’s calculation.

The numbers themselves aren’t as important as what this exercise suggests: that helping millions of Americans overcome opioid addiction might be as important to the US economy as monetary policy.