Other than supply and demand, the U.S. economy is doing fine.
The problems on the demand side are well known. Though the job market is definitely improving, over five years into an economic expansion, there’s still considerable slack, as Fed Chair Janet Yellen rightfully and frequently highlights.
But there’s an even longer-term challenge confronting the U.S. economy having to do with the supply of inputs that are just as essential to economic growth as nutritional inputs are to physical growth. And we think we have a way to help.
At the heart of this supply-side challenge is the declining US labor force. In the two decades prior to the Great Recession, the U.S. labor force grew a bit more than one percent per year, and 66 percent of the working-age population either worked or looked for work.
Since then, under the weight of both the downturn and our aging demographics, that participation rate has fallen faster than any time on record to its current level of 63 percent. Going forward, the Congressional Budget Office expects that retirement will reduce labor force activity by about two more percentage points in the next decade. The CBO expects this decline in the workforce to shave almost a full percentage point from GDP growth per year, compared to the past 60 years.
But it is by no means the case that all the labor force exiters are retirees. Well before the downturn hit, a significant number of young (16-24) and “prime-age” (25-54) adults gave up on the labor force. And, since the recession began, those below age 55 account for about half of the decline in workforce activity that we’ve seen.
Since 2000, participation among youth has dropped from 69 to 55 percent, which is mostly not explained by higher school enrollments; and it has dropped from 91 to 83 percent among prime-age, non-college men.
It’s no mystery as to why so many of these workers are dropping out. The decline in labor force activity has been greatest among our least-educated workers and more concentrated among men than women. Less-educated men — those with little schooling beyond high school — experienced the largest increases in unemployment during the downturn and the largest long-term declines in real wages. This unforgiving combination of job and wage losses contributes to poverty and rising inequality, as well as slower growth.
It also begs the central question: Just how unreachable are these people? Both for their own well-being and for that of the macro-economy, could strong job creation and the right set of human capital policies bring at least some of them back in from the cold? We think so.
In the short term, expanding a range of work-based learning models like apprenticeships would improve both the employment rates and the earnings potential of young and less-educated workers, giving them the credentials and work experience they have trouble getting right now. Apprenticeships cost very little public money, as employers are directly paying workers for their output while they gain needed skills. The employees tend to be highly motivated to successfully complete their training, as they are being paid while they learn.
Over a longer period, rather than scattershot training programs with mixed track records at best, we also need to expand “sectoral” and career pathway training programs that target high-demand fields like health technology and advanced manufacturing, fields that pay middle-class wages but do not always demand a four-year college degree. Targeting these fields reduces the likelihood of production bottlenecks while also providing workers the skills they need to obtain good-paying jobs over time.
We believe it’s possible that this approach would encourage more young people to remain attached to the world of work and pull back in some of the ones who’ve left.
To be clear, in the near term, we’re not worried about any supply constraints posed by a slower-growing labor force. Neither wage nor price pressures are flashing any warning signals in that regard. For now, our economy is clearly demand-constrained.
But, assuming we eventually get rid of all this slack and hit the supply constraints that CBO and others are warning about, there’s a win-win opportunity to do something about it. By aggressively attacking the structural decline in the labor force participation of younger and prime-age workers, we could help boost the broader economy’s speed limit. And, in the process, we would also be helping the communities who’ve been most hurt by structural changes in our economy, while providing some of our most disadvantaged workers a chance to come off the sidelines, get back in the game, and start scoring some sorely needed economic points.