PRIOR TO the “Great Recession,” two-thirds of working-age Americans were either working or seeking work. But since 2007, when it averaged 66 percent, the labor-force participation rate has plunged by 3 percentage points through the first half of this year, and the decline continued even after the admittedly subpar recovery began. In August, just 62.8 percent of the working-age population was in the labor force, according to the Bureau of Labor Statistics, and there is a real possibility that labor-force participation may never return to its pre-crisis level. This threatens prosperity for two related reasons: a permanently smaller labor supply means a reduction in the economy’s capacity to grow; and the smaller economic pie will have to be shared with a larger “dependent” — i.e., non-working — population.
What to do about this problem depends greatly on why it’s occurring — but economists debate the degree to which it reflects long-term structural factors, such as the aging population, or the lingering effects of the brutal recession, such as larger-than-usual numbers of discouraged workers and long-term unemployed. If the problem is cyclical in nature, experts say, that argues for a continuation of the Federal Reserve’s easy-money policies, to help boost short-term growth; insofar as it’s structural, government needs to devote more attention and resources to solutions such as immigration, more efficient training and education, or the reform of disability programs that currently incentivize workers to exit the labor force.
It’s such a central issue that a standing-room-only audience assembled Friday at the Brookings Institution to hear the latest research results from five top Fed economists (affiliated with the central bank but not speaking on behalf of it). Their study suggests that three-quarters of the drop in labor-force participation during the recession is due to long-term demographic factors — especially the aging of the population; the recession coincided with the first baby boomers retiring — that had already been at work prior to the crisis. This, in turn, implies that the Fed can’t do much more in the short run and that, over the long run, the United States is going to have to get much smarter, and more aggressive, about getting the most out of its labor pool. The Fed economists project that labor-force participation will fall to 61 percent by 2022, consistent with previous estimates by the Labor Department and Congressional Budget Office.
The Fed team’s conclusions are controversial, especially among economists who argue there is still too much unexplained slack in the labor market for the monetary authorities to contemplate ending its stimulus programs — which is what the central bank has already started to do. Yet even if the Fed delays tightening, it has to tighten someday. By the same token, even if the Fed economists underestimate the cyclical component of labor-force shrinkage, the demographic component is still plainly very large. For this structural weakness, the country needs structural policy changes, sooner or later, so the wise course would be to start working on them now.
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