By Rex Nutting
A big change is coming to the U.S. economy: a prolonged period of labor shortages. And nearly everything we’re doing now is making the problem worse.
Over the past year, we’ve seen a hint of what labor shortages could mean: delays, higher prices and the frustration of not being able to buy things when we want them.
But we’re not really short of workers quite yet. Hundreds of thousands of people enter the workforce each month, and companies are hiring at a rapid pace.
On Friday, the Bureau of Labor Statistics estimated that nonfarm payroll jobs increased by 372,000 in June. That’s a slowdown from the average of 545,000 over the past year, but it’s more than the average hiring in the 2010s of 190,000.
But soon enough, sometime in the next few years, the lack of available workers will slow monthly job growth below 100,000, perhaps to less than 50,000 .
That’s not a reckless economic prediction; it’s a conservative demographic projection of current trends.
This structural labor shortage could have a profound impact on our economy, politics and society, both good and bad. But if we want the good things that could come from slower growth, we’ll have to plan for it.
Demographic tidal wave
Roughly speaking, the growth rate of an economy is determined by two factors: growth in hours worked (mostly because there are more workers) and growth in productivity, including the increased output unlocked by machines, software, human capital, and more efficient methods of organizing production and commerce.
The United States is among the fortunate countries: growth in the labor supply is expected to slow but not actually decline, unlike in Europe and East Asia, which are on track to shrink dramatically as those countries age. Even China’s massive labor force will shrink.
Starting in the 1960s and ’70s, the U.S. economy has been propelled by a demographic tidal wave, as the 76 million baby boomers grew up and made their way into the world. Women entered the workforce in large numbers at the same time.
In the 1970s, the working-age population (15 to 64) was growing by nearly 2 million a year and, boosted by older women going to work, the labor force grew by about 2.5 million a year. No wonder employment grew by 19 million during the decade and annual GDP growth averaged 3.2%.
A similar demographic bulge hit the economy in the 1990s, when Gen X and the first wave of millennials began to work. The working-age population rose by 1.3 million a year and the labor force grew by 1.6 million a year. Employment increased by 22 million during the 1990s and GDP averaged 3.4%.
But now the tide is going out. Next year, the working-age population is expected to grow by just 400,000. In 2024, it’s expected to grow by 300,000 and by just 200,000 in 2025. The pool of workers will begin to grow a bit faster later in the decade and throughout the 2030s, but current projections through 2060 don’t foresee the labor supply returning to the same growth rate we’ve gotten used to over the past 70 years.
We can’t go back in time and raise the birthrate of 2002 to get more workers today but there are things we can do to increase the supply of workers or find ways to increase their productivity.