Slower growth in the number of workers tends to hold back gross domestic product and employment, economists say. And that makes it less likely that the economy will pick up steam at the rate it did in previous recessions.
These changes in the labor force “imply that future recessions will be deeper, and will have slower recoveries, than historically has been the case,” according to a paper issued last month by James H. Stock of Harvard University and Mark W. Watson of Princeton University.
Their research shows that as much as half of the relative slowness of the recent recovery may be attributable to the fact that the growth of the U.S. labor force has declined.
“The demographics turn out to be a very important factor,” Stock said in an interview.
The slower growth in the labor force arises from two factors, according to the BLS. First, the U.S. population is growing more slowly. Second, the percentage of Americans working or seeking work will continue to decline as the population ages.
What exactly stalled the recovery from the recent recession and what might still be holding it back continue to be a matter of debate among economists and politicians.
The doddering nature of the recovery has been blamed on a variety of factors: the financial nature of the crisis, the fact that millions of homeowners are struggling with mortgage debt, the size of the government stimulus, as well as spiking gas prices, the Japanese earthquake and the European banking troubles.
The role of demographics has been relatively unexplored, and in contrast to those other causes, the decline in the labor force will probably be a persistent feature of the U.S. economy for the foreseeable future.
In the mid-1980s, the labor force — defined as the number of people working or seeking work — was growing at about 1.7 percent per year, according to Stock and Watson’s calculations. By the mid-2000s, the growth was just about half that, or 0.9 percent.
The growth, moreover, is anticipated to slow even more in the years to come. In labor force estimates published by the BLS, annual growth of the labor force shrinks to less than 0.6 percent by the end of the decade.
One of the primary causes for the decline of labor force growth is the retirement of the giant baby-boom generation. Last year, the first baby boomers, born in 1946, reached 65, the traditional age of retirement. They are less likely to work.
Second, through the 1990s, a rapid rise in the percentage of women working led to a surge in the size of the labor force. But once the percentage of women in the labor force reached about 60 percent, it stopped climbing, and economists see little immediate sign that it is likely to rise again.
The labor force participation of women “is as high as it has ever been,” said Claudia Goldin, a Harvard economics professor who has studied the issue. And “it has not gone higher in the last 20 years,” she said.
But the high numbers of women attaining bachelor’s degrees suggest to some that there is a large group of women who could be enticed into joining the workforce. In 2010, 36 percent of women ages 25 to 29 had bachelor’s degrees, compared with 28 percent of men of the same age group.
“We are not yet convinced that female labor force participation has peaked,” said Aysegul Sahin, an economist with the Federal Reserve Bank of New York. “There is a pool of high skilled women who currently choose not to participate in the labor force. It is not clear that they will continue to do that.”
The labor force participation rate among men 25 and older, meanwhile, has been in a decline, and stands at 73 percent.
Assuming that the growth of the labor force continues to decline as expected, there are important ramifications for the economy.
For starters, when the labor force grows more slowly, the growth in the number of jobs and the growth of GDP is unlikely to be as robust as it otherwise would be, economists said.
The reason is that in the long run, an economy adds jobs to accommodate the size of its labor force. Eventually, wage levels rise or fall to a level that leads to a “natural” level of unemployment. So the slowing growth in the labor force means that the growth in the number of jobs should slow, too.
“Over decades, what determines job growth are the number of people who want to find a job,” Stock said.
The decline in job growth, in turn, means that the growth of economic output will decline, too — assuming no compensating rise in productivity.
“In the end, what an economy is depends upon how many bodies you have,” said Anthony Carnevale, an economist and director of the Georgetown University Center on Education and the Workforce.
Carnevale added that if the diagnosis for what ails the economy is the size and quality of the workforce, that may be good news, at least compared to theory that the biggest problem is foreign competition.
“To the extent this is a domestic demographic problem, it’s more in our control,” he said. “We can’t blame the Chinese for the quality and quantity of our domestic labor force.”