03 May 2019

What a Shrinking Labor Force Means for the Job Market & the Economy

Since December, the labor force has shrunk by 770,000. This is one reason that the unemployment rate hit its lowest in this century in March. (It's been half a century since unemployment was at 3.6%.) This fall in labor force could be random variation but it may be a sign of a trend.

As you can see in this graph, the rate of growth in the labor force has been steadily falling in the last 5 decades.

Baby boomers and immigrants drove a big rise in the labor force. LBJ's Immigration and Nationality Act in 1965 ended the fairly racist quotas for immigration and increased the number of immigrants about the same time that baby boomers entered the job market. The birthrate for a stable population is about 2.1 births per woman. In 1960, the US had a birthrate of 3.65 and in 1973 it fell below 2, where it has stayed since.

The number of kids coming of age and the number of immigrants coming to our country have both steadily dropped since the 1970s. It is conceivable that in the 2020s, the labor force will actually stop growing.

This is good news for workers. Sort of.  It should be mean strong wage growth for the millennials whose careers started out in the midst of the Great Recession. Workers will have more power in negotiations with companies who are competing for a shrinking pool of workers. They deserve it and it could be good for their pocketbooks. This also suggests that house prices will increase at a slower rate as demand for housing eases.

The news is not as good for the economy for at least two reasons.

The most obvious is that the ratio of retired to those working will go up. That suggests more poverty among the retired than we'd otherwise have. (Baby boomers might care about this.) Elder care will be more expensive as wages rise.

Less obvious is what fewer workers mean for an economy.

Just today the New York Times published a story on how Hungary's economy is now limited by workers. Prime Minister Viktor Orban is, like Trump, an anti-immigrant nationalist.  Hungary is not the only European country experiencing lower birthrates, though. Demand for workers is up throughout much of Europe. Because of this, Hungarian workers are leaving for better paying jobs in big European cities. So Hungary's labor shortage is driven by two things: its own people emigrating to other countries and other people not immigrating into Hungary. As a result, businesses are turning away orders because they cannot fill them.

How are we i the US doing with immigration as birthrates fall?

Foreign student enrollment in American universities has fallen two years in a row - essentially since Trump has taken office. The immigrants we should most want - those able to get into our universities - are choosing to go elsewhere, raising the probability they will go work elsewhere.

There is something else going on here that rarely gets mentioned. As population increases, so does per capita GDP. More people stimulate more ideas, more creativity, more products, more technologies, and more businesses. This is a big reason why productivity and wages are so much higher in cities than in rural areas. Our creativity is stimulated by interactions with people; and the more diverse that group, the more creative our response.

The good news about diminishing growth in the labor force is that it will mean that workers will likely get more of the pie, be able to negotiate higher wages this year. The bad news is that there will be less pie, less creativity, innovation and entrepreneurship than we'd have with a larger, more diverse population and wages - while taking a higher percentage of corporate revenue - could actually be lower than they otherwise would be. (And that, of course, suggests company earnings would be smaller for two reasons: smaller portion of revenues going to profit and smaller revenues.)

As birthrates fall across the West, smart countries will compete for immigrants, not shun them. Us? Well, apparently we're cashing in our lead in immigration and choosing to become more like Hungary.

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