THE LABOR MARKET IS BROKEN

INFLATION IS UP. The stock market is down. Unemployment is just 3.5 percent. Yet labor force participation remains stubbornly low, with only 62.3 percent of the civilian population working or actively looking for work-well below pre-pandemic levels. And even before the pandemic, that figure had been steadily declining for years.

- KATHERINE MANGU-WARD

There are plenty of uncharitable theories about why the American work force is shrinking as a percentage of the population, resulting in 10 million unfilled jobs and a lot of well-wrung hands. The most common is simply that Kids These Days don't want to work and it'll be Gen Z's fault when the U.S. is no longer a global economic superpower.

A substantial number of younger people are not, in fact, keen to get hitched with an employer. In 2022, "for every [25to 54-year-old] guy who is out of work and looking for a job," American Enterprise Institute economist Nicholas Eberstadt told the Fifth Column podcast, "there are four guys who are neither working nor looking for work." But the Kids These Days hypothesis is complicated by the fact that while the labor force participation rate includes people 16 and older, the largest component of the most recent reduction appears to be older people who took retirement early and/or previous retirees who have not rejoined the work force at the rates they once did. This trend may well reverse itself if the stock market continues to decline and retirement accounts evaporate, but for now it looks like baby boomers turning on, tuning in, and dropping out-however belatedly are at least as much of a labor force problem as wayward youths.

WHAT THESE TWO groups have in common can be found in an old chestnut of game theory: the ultimatum game. Even if you don't know the 1982 paper that popularized the experiment, you've certainly encountered the phenomenon. Imagine two people, one of whom is given $10 and told to propose a way to split the money with another person-a stranger, let's say. The catch is that if the stranger doesn't agree to the deal, they both get nothing.

Economists and psychologists alike love this experiment because it captures an interesting facet of human behavior that appears irrational at first glance.