Just the facts
• The US labor force is expected to grow by 0.5% per annum over the next 10 years — faster than the previous 10 years and enough to modestly accelerate the potential growth rate of the US economy.
• The employment-to-population ratio for prime workers is now within striking distance of the levels seen during the 1980s and 2000s expansions.
• If that ratio were to rise by another 2%, it would match its highest level ever, reached during the 1990s expansion. (This is not a given, as it would depend on some policy changes being made.)
• US LFPRs are among the lowest in the developed world (Figure 1), especially for men and older workers, with room for material improvement.
Data source: Organization for Economic Cooperation and Development (OECD). As of February 2019.
Figure 1: Labor force participation rates for 25- to 54-year-olds
Source: Organization for Economic Cooperation and Development (OECD). As of February 2019. Based on available data and for illustrative purposes only.
US labor force trends could potentially help lengthen the economic expansion by two years or more, argues our senior macro strategist.
Until recently, one of the striking features of the current economic expansion was the decline in the US labor force participation rate (LFPR). Most forecasters had predicted that the LFPR would continue to fall amid the ongoing retirement of the baby boom generation. Recently, however, there has been a stabilization and slight improvement in the LFPR. What gives?
Only about half of the decline in the LFPR was due to the baby boomers, many of whom will continue to retire in large numbers. The other half, after falling for over 20 years, has begun to turn around since 2015. This increase in the participation rate of “prime” workers (25 – 54 year-olds) is encouraging.
The gradual climb back of prime workers has helped to prolong the expansion with muted inflationary pressures, as the growing supply of workers has slowed the tightening of the labor market. With this expansion now rivaling the longest in US history, it is worth asking:
• How many more workers can the US bring back into the labor force (or keep engaged) over a sustained period?
• Will these additional workers be enough to help keep the expansion going, and for how long?
“Base case” and “best case” scenarios
My base case: Given labor supply trends in place today and barring any unforeseen events (like a potential shock to the economy), I believe there is some room for more prime workers to return to the workforce, potentially helping to lengthen the current economic expansion by another two years.
My best case: With the right policy changes, I believe it is possible the expansion could last up to five more years, with as many as five million prime workers returning and five million older workers staying on under this scenario.
Where might these additional workers come from? More disabled workers reentering the labor force are one potential source. Also, many millennials who opted to stay in school longer will soon graduate and join the workforce. Parental leave and similar policies in the US lag many other countries, suggesting that some workers who left the labor force for childcare can be lured back with the right incentives.
Education is another area where the US has some catching up to do with its global peers. Not surprisingly, LFPRs are significantly higher for workers with college degrees than for those with little or no education. Meaningful efforts to bridge that gap will be one key to increasing prime-worker participation in the labor force going forward.
Immigration would seem another logical way to bring in additional workers. US immigration policy used to be the model for the world; today, in contrast to the US, many countries are opening their doors to skilled foreign workers. If US restrictions on immigration were eased down the road, we’d likely be able to add many more workers.
Meanwhile, older (55 – 73) worker participation rates are headed higher globally due to longer lives, flexible work arrangements, and other factors. Nowhere is this more evident than in Japan (Figure 2). In the US, where the social safety net is thin, such participation rates will likely keep rising. Indeed, choices made by the baby boomers in the coming years will be critically important for any upside surprises in labor force growth.
Figure 2: Labor force participation rates for 55- to 64-year-olds
Source: Organization for Economic Cooperation and Development (OECD). As of February 2019. For illustrative purposes only.
As wages rise, many of the workers who had left the labor force for various reasons are making their way back. How long this phenomenon can persist is where the role of policy comes in. Prudent policy management — not only fiscal and monetary, but also social — can extend economic cycles, especially in economies increasingly driven by services rather than goods. Future policy developments with the potential to enhance the labor supply will be worth watching.
I believe that over the next five years, we may see policy focus more directly toward raising LFPRs. Under an upside scenario, we could not only see millennial participation rates reach prior highs, but also more older workers staying in the workforce longer. Conceivably, this could even result in what I believe would be a “best-of-both-worlds” scenario — labor force growth accelerating past the projected 0.5% per annum1 without a big spike in wages and inflation, even as the unemployment rate remains low.
• To the extent that some workers rejoin the labor force armed with higher education, this will likely boost productivity growth and potentially overall economic growth as well.
• A larger supply of workers historically has helped to keep a lid on wages (and inflation). A slower rise in wages, all else equal, translates to a more patient US Federal Reserve (Fed) with regard to raising interest rates.
• As millennials gain a bigger share in the workforce, consumer spending in areas related to housing, as well as discretionary spending generally, is expected to rise.
• If more older Americans work longer (as expected), entitlement spending will be less pressured, likely allowing government deficits to fare better than current projections.
• From an industry standpoint, older workers can add considerably more value in service industries, which are less taxing physically, than in industries primarily involving goods.
by Wellington Management
Juhi Dhawan, PhD, Macro Strategist
1Data source: Organization for Economic Cooperation and Development (OECD). As of February 2019.
Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may make different investment decisions for different clients. Any forward-looking estimates or statements are subject to change and actual results may vary.
Originally published by Wellington Management March 2019.
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