The Labor Market Is Broken

Employment is an ultimatum game, where playing along might get workers less than employers, but refusing to play gets everyone zero.

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.

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 [25- to 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. Surely the second man should accept any deal offered by the first. So what if he's offered just a penny? Free money is free money! Who cares if the other guy gets to keep $9.99? Instead, across all cultures and contexts, people reject offers they perceive to be unfair: The details vary, but human beings turn down money with astonishing consistency if they think they're being done dirty.

This allergy to economic unfairness may well be what unites the "quiet quitters" of Gen Z and the early boomer retirees: They increasingly perceive the terms of employment to be so off-kilter that they would rather not work at all, even if that decision screws them over in the end.

"The process of contracting a worker is often close to ultimatum bargaining," explained Elwyn Davies (then with the University of Oxford) and Stanford University's Marcel Fafchamps in a 2016 paper exploring the effects of competition on behavior within the ultimatum game. "The employer specifies a job description and proposes a wage and the worker accepts or rejects."

So if employment is an ultimatum game—where playing along might get workers less than employers, but refusing to play gets everyone zero—what is causing the perception that the terms of employment are no longer worth accepting, even when both parties would benefit?

Positive views of capitalism more generally have slipped since 2019, with 39 percent expressing negative views in an August Gallup poll. Another Gallup poll found an uptick of 3 percentage points in people who say they are "completely dissatisfied" with their jobs, while the number of people who were "completely satisfied" fell 8 points.

The perception that conventional jobs are essentially offering workers a pittance while greedily holding back the bulk of the wealth is common in places like the r/antiwork subreddit, which has 2.3 million members. In fact, there's at least one discussion of the ultimatum game itself on that subreddit, which pulls some figures on companies' revenue vs. worker compensation and concludes: "If working for Apple was the ultimatum game, the proposer just got $100. They're offering you 23 [cents], and they keep $99.77. Deal or no deal?" The relative sizes of these numbers might also explain why simply raising wages hasn't brought people into the workforce, especially when paired with increased awareness of and dissatisfaction with the gap between CEO pay and worker pay in large corporations.

Early retirement also makes some sense on this accounting. Older people may have expectations about what their compensation or responsibilities should be, with reference to either the generation who retired before them or to their younger colleagues. When they are not offered what they perceive to be their due, they would rather zero out their income than continue to work.

Paul J. Zak, a neuroeconomist who has done experimental work on the role of empathy and perspective-taking in the ultimatum game, cautions against an approach that is "too econo-centric." Large and unpredictable government subsidies to individuals and corporations erode the broader sense that hard work will be rewarded and is worth pursuing, even if the wages offered previously seemed fair. There is almost certainly more at play than wage and price levels alone.

The pandemic threw a wrench into this and every sociological and economic question and will continue to annoy academics looking for patterns for at least another century. Many jobs did get appreciably worse during the height of COVID, when death suddenly became a possible side effect of working in the grocery store, a factor that shouldn't be underestimated. But decreases in labor force participation predate the pandemic.

In many ways, work is better than it has ever been. It is less dangerous, requires fewer hours, is less physically taxing, and affords the purchase of better stuff than for most of human history. But the supply chain interruptions of recent years paired with rapid changes in the terms of employment during the pandemic may well have disrupted the sense that the deal workers were being offered was fair.

The temptation of the ultimatum game is to dismiss the results as irrational and therefore bad. It's easy to dismiss workers as lazy or employers as short-sightedly selfish. But the consistency with which individuals in nearly all situations perform in the ultimatum game actually highlights something good about people: They care about what is fair and they will devote significant effort to making deals where everyone wins. The authors of that 2016 paper found, for instance, that in an environment with multiple employers and multiple employees, the offers tended to start higher and employees tended to do better overall. Competition causes employers to think harder about what workers want and to offer it as seamlessly as possible.

Right now there's something broken in our economy that is preventing employers and employees from cooperating with each other. The result is that too few deals are being struck and everyone is suffering. The challenge ahead is how to rebuild a sense that the game is fair and everyone is playing in good faith.