For decades, the American labor force grew at a rapid rate, helping to spur strong economic growth.
Those days are past.
In the coming years, the labor force should grow at a more moderate pace, as significant demographic changes take hold. The number of workers in the prime age category of 45 to 54 is expected to decline about 8 percent by 2020 from the previous decade. The fact that there are fewer people in that age range could both increase the demand for older people to stay on the job and provide opportunities for younger workers to move into positions normally filled by people in their 40s and 50s.
With those demographic shifts, the usual measures of the labor force may not give an accurate picture of the economy’s health. The United States, for example, most likely will not need to create the same number of jobs to keep unemployment steady or bring it down.
After World War II, the growth in the American labor force was driven by the swelling population and the increasing number of women who chose, or felt compelled, to work outside the home. But the proportion of women who worked began to stabilize in the 1990s, and the baby boomers, the largest cohort of workers in recent decades, have started to retire.
The labor force is continuing to grow over all, in part because many of the boomers have delayed retirement. But the growth is much slower.
An increasing pool of workers is critical to economic growth.
The Congressional Budget Office calculated that from 1948 to 2001, the growth in the work force contributed about 1.7 percentage points a year to the American economy. But its contribution to the economy began shrinking after that, and over the next few years it is expected to be only half a percentage point a year. All other things being equal, the next decade will have slower growth than we have come to expect.
Of course, the economy today is still recovering from the credit crisis and worldwide recession, and there are not enough jobs for the current work force. The slow growth of the work force, however, has allowed the unemployment rate to fall rapidly even though job creation is far below the level of a few years ago.
Decades ago, a rule of thumb was established that the economy needed to add 150,000 jobs a month to accommodate new entrants to the labor force. That number has been repeated often during the recent recovery, reflecting worries that the unemployment rate will remain very high unless the pace of job creation rises significantly.
But in the last 24 months, the unemployment rate has fallen by 2.1 percentage points — one of the fastest declines on record — to 7.7 percent. Unemployment has dropped significantly even as job growth has averaged 167,000 jobs a month, little more than the supposed break-even rate. Given the changes in the labor force, the break-even rate now is probably around 90,000 per month, and it might be lower.
Mitra Toossi, an economist at the Bureau of Labor Statistics, estimates that the labor force will reach 164.4 million by 2020, up from last month’s level of 155.3 million. If that happens, 100,000 people a month will enter the labor force, on a net basis.
If we added around 93,000 jobs a month during that period, the unemployment rate would stay around 7 percent. A higher rate of job creation could bring the unemployment rate down rapidly.
One reason that people perceive a job problem that may be larger than reality is the “participation rate,” the percentage of working-age people who are in the labor force, either working or looking for work. That rate peaked at 67.3 percent in 2000, and was just 63.6 percent last month. Back in 2010, when the unemployment rate peaked at 10 percent, the participation rate was 65 percent.
It is important to understand why that rate fell, and why it is likely to continue doing so even if the economy becomes much better.
One reason for it to decline — and the one that people tend to talk about — is that workers become discouraged and drop out of the labor force. To the extent that is happening, it is a bad sign.
Over time, however, the principal reason for a declining rate is something else entirely. It is the aging of the population.
The participation rate covers all people aged 16 and over. Obviously, someone who is 16 is more likely to be in school, and someone who is 75 is more likely to be retired, so the mix of the work force is important in evaluating the raw number.
Researchers for the Federal Reserve Bank of Chicago concluded last year that roughly half the decline in the participation rate over the last decade was related to the changing work force, and the rest was caused by the economic slowdown.
The accompanying chart, produced by the Fed, shows the participation rate for the work force between 16 and 79, not for the entire work force. The researchers conclude that for the economy to grow at its full potential, the participation rate should have fallen from a peak of 69.4 percent in 2001 to 67.6 percent this year.
During the late 1990s, the rate was higher than their target, reflecting the overheating economy that sent unemployment rates down to historical lows.
Now, the rate is about 66.6 percent, or one percentage point below the expected. If the rate were to stay at the current level until 2015, the economy would then be running at full steam or close to it, according to the calculations.
The expectation is that older workers will play an increasingly important part in the work force. During the mid-1990s, people in what were historically considered the prime working ages, 25 to 54, made up as much as 72 percent of the work force. That is expected to be down to about 64 percent by 2020, and the share of younger workers is also expected to decline, in part because more people will choose to seek higher education.
But the proportion of workers who are over 55, which was less than an eighth in the mid-1990s, is forecast to rise to more than a quarter by 2020, with increasing numbers of people working past 65.
Those demographic trends could affect many aspects of life in the United States. With fewer young workers to pay Social Security taxes, pressure may increase to raise retirement ages. Immigrants, who have been vilified by some politicians in recent years, may be looked to as a way of both increasing the number of workers and lowering the average age.
One wild card is the changing pension policy. The era of guaranteed retirement income may be ending, as some government workers lose the promise of a defined-benefit pension. With more people dependent on investments for income, a prolonged period of strong growth and a good stock market could encourage more older workers to retire. But the opposite could lead many of them to try to hang on to their jobs as long as possible.