08 December 2012

From Jobs Shortage to Labor Shortage - a Forecast of Good Times

Given we've yet to fully recover from a recession begun 4 years ago, it is easy to be pessimistic about the future.  But pessimists will miss a demographic trend that is likely to dramatically change the job market over the next few years. At the risk of sounding like a contrarian, I'd like to predict a worker shortage that will soon improve employment opportunities.

Baby boomers are retiring, leaving the job market in droves. The generation coming of age is the product of lower birth rates. This suggests a coming labor market crunch, a worker shortage. This can be seen in the small gap between the number of people retiring and the number entering the job market.

Each year, more than 3 million new graduates enter the job market to take the place of nearly 2.4 million retirees. If every retiree left behind a job for a new worker, that would leave nearly 700,000 new graduates without  a job. But the American economy has historically created close to 2 million jobs a year, just as it has in the last 12 months. 

Decade    Avg. Annual Job Creation
1960s                   1.7 million
1970s                   1.9 million
1980s                   1.8 million
1990s                   2.1 million
2000s                  -0.1 million
Last 12 months     1.9 million.

If you create jobs faster than people enter the job market, the unemployment rate drops. If the American economy adds 2 million jobs while only 700,000 new people enter the job market, the unemployment rate will drop about 1%, just as it did in the last 12 months. The lower the rate of job entrants, the low the rate of job creation necessary to lower unemployment. If the American economy continues to create roughly 2 million jobs a year with this lower rate of (net) new entrants, demand for labor will rise faster than its supply and wages will rise.

The history of recent decades suggests that the rate at which the American economy creates jobs changes less rapidly than does the rate at which children become adults and need jobs.

In the 70s, the American economy created 1.9 million jobs a year and yet unemployment was 2.5% higher at decade's end than it's beginning. By contrast, in the 80s and 90s, the economy created roughly the same number of jobs and yet unemployment steadily fell. The baby boomers born in the late 40s began hitting the labor market in the 70s. Birth rates roughly 21 years earlier explain unemployment rates as much as job creation rates. Whether 2 million new jobs lowers or raises unemployment depends on how many young adults are entering the job market.

In 1966, roughly 2.7 million young people turned 21 and unemployment was 3.8%; by 1972, 3.8 million turned 21 - rose a million - and the unemployment rate rose to 5.2%. By 1975, 4 million turned 21 and that year unemployment hit 8.2%. It seemed to take awhile for the economy to absorb these new adults as employees. As the rate of new job entrants increased, so did unemployment rates. From 1984 to 1988, the number turning 21 dropped from 4.1 million to 3.5 million, and unemployment dropped as well, from 7.3% to 5.3%. From 1991 to 1997, the number turning 21 dropped further, from 3.7 million to 3.2 million and unemployment also dropped further, from 7.3% to 4.7%.

Here's a table showing changes from the beginning to end of the decade:

Decade    Change in Number Turning 21       Change in Unemployment Rate
1970s                  +0.7 million                                     +2.5% (from 3.5 to 6)
1980s                  -0.7 million                                      -0.6%  (from 6 to 5.4)
1990s                  -0.3 million                                      -1.4% (5.4 to 4)
2000s                  +0.5 million                                     +5.9%  (4 to 9.9)
2010s*                    0 million                                      -2.2% (9.9 to 7.7)                                 
*so far

There is more going on here than demographics, but an increase in the rate of people turning 21 seemed to drive an increase in the unemployment rate. (The aughts were fraught with issues more complicated than demographics and every decade had its issues separate from birth rates of decades earlier.) A drop in the rate of new 21 year olds seems to cause a drop in unemployment; a rise in that rate of new 21 year olds seems to cause a rise in unemployment. These two rates tended to move together.

This bodes well for our decade. Not only is the rate of new 21 year olds dropping but the baby boomers are now retiring. Job creation rates don't have to be terribly high to bring down unemployment rates quite a bit.

Many critics have claimed that the American economy is not creating jobs fast enough. What critics miss is that this economy does not now need to create as many new jobs to lower the unemployment rate. In fact, we already have a strong recovery. Soon, the evidence of this will be seen in paychecks. 

The really good news is that this decade should reverse the terrible decade of the aughts, when we lost more jobs than we created. The even better news is that for the first time since the late 90s, workers will find themselves in a stronger position to negotiate for pay, benefits, schedules, and the design of jobs. In fact, the job boom of the 2010s may be even better than that of the 1990s. 

Happy holidays!

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