This Indicator Portends Poorly for the U.S. Workforce Lombardi Letter 2017-09-07 02:13:33 federal reserve job cuts 2017 U.S. unemployment forecast 2017 what does shrinking U.S. workforce mean for us economy U.S. workforce population U.S. labor force U.S. economic growth U.S. gdp forecast 2017 U.S. economy 2017 U.S. workforce Shrinking labor participation is a major problem for the U.S. economy 2017, contributing to the record income inequality for the U.S. workforce. News,U.S. Economy

This Indicator Portends Poorly for the U.S. Workforce

U.S. Economy - By Benjamin A. Smith |
U.S Workforce

U.S. Workforce Sputtering with Shrinking Labor Participation Gripping the Nation

Shrinking labor participation is a major problem for the U.S. economy 2017, contributing to the hollowing out of the middle class and record income inequality. The halcyon days of a “chicken in every pot” and a “car in every garage” are increasingly pipe dreams for ordinary citizens, thus threatening the American dream. For the first time ever, the U.S. workforce is wondering whether good jobs will come back, or whether the labor pool is just too expansive to attain a fair wage. More than sluggish U.S. economic growth is at stake; millions of American livelihoods, retirement accounts, and portfolios are too.

If we look at the labor force participation rate, we notice some troubling trends. This metric is widely followed because it measures the percentage of people not in the labor force compared to the working age population, and declining levels generally signify lower productivity, constrained wage growth, and lack of good jobs. Right now, that number is at 63%, which is at roughly 30-year lows.


Even more puzzling, this comes at a time when the U.S. economy is at full employment. The latest March 2017 data shows the official national unemployment rate at just 4.7%, below the five-percent level generally considered by economists as “full employment.” So something is not adding up here: Why are people dropping out of the workforce when the job market is so tight?

One reason has to do with the fact that many people aren’t actually dropping out of the workforce. The Bureau of Labor Statistics (BLS) just pretends that they have. Instead of counting only people who have truly stopped looking for employment altogether, they include people in small towns who cannot obtain employment when the main employer leaves, or bogus disability claimants. Some people believe this omission is political, to make the headline employment number look better than it actually is. But we’ll leave that for others to decide.

Another reason has to do with shrinking labor participation among young people, who increasingly opt for more schooling rather than accept a “menial” job. Millions of young American students are piling on more student debt (now over $1.0 trillion nationally) to attain that cushy job (which is harder to obtain) than starting from the ground-up. Some would argue this in itself shows that the labor market is in rough shape, and we tend to agree. Going back to school and rolling the dice that something better turns up is one way of avoiding the disappointment of not obtaining your ideal job to begin with.

Yet another reason has to do with demographics, and the equation is simple. The older the worker, the more the shrinking labor participation becomes apparent. The participation rate of the core 25-54 year old demographic has been above 80% since data has been calculated. But this number drops to around 65% for the 55-64 year-old demographic; and down to 25% for the 65-74 year-old crowd. Simply put, people choose to work less the older they get—unless they have to. Older people are actually joining the U.S. labor force in greater numbers than ever before, but it’s not by choice. They are making up for shortfalls in stagnating social security and minuscule interest on their savings.

U.S. Labor Participation Rate

The effects of an aging U.S. workforce are actually the biggest contributor to shrinking labor participation, according Dallas Federal Reserve Bank President Rob Kaplan. It is his belief that the “majority of this decline is due to aging-population demographics, and that this trend will intensify in the years ahead.” His remedy for the situation: more jobs training programs and an expansion of the workforce to improve productivity. (Source: “America Has to Close the Workforce Skills Gap,” Bloomberg View, April 12, 2017.)

Regardless of the cause-and-effect outcome of shrinking labor participation, this is resulting in the decline of the middle class we’re witnessing today. When fewer people earn livable wages, households become more fragile and disposable income vanishes. While the top one percent of earners make up some of the slack, they spend less as a proportion of income on goods and services than middle-class earners do, and the economy suffers as a result. All things being equal, the economy would be better off with 100 million people earning $50,000 annually than 10 million people earning $500,000 per year.

What Does a Shrinking U.S. Workforce Mean for U.S. Economy?

The labor force isn’t technically shrinking per se, although it feels that way. According to current data, the working age population in the U.S., aged 15-64, is 205.8 million people and slowly rising. This figure generally moves in relation to the overall civilian population, which is a record 326.4 million people.

Despite the fact this occurrence has yet to happen in America, we can witness the devastating effects it has on other industrialized nations with low birth rates; namely Japan.

It has been said that if Japan’s population declines at its current rate and productivity continues to lag, negative economic growth could be commonplace by the 2040s, according to the Cabinet Office. To keep real economic growth in the 1.5%-2.0% range (still stall speed), Japan would need to sustain a population of 100 million, and keep productivity on par with the world’s most productive nations. That’s quite a feat, considering Japan women only average 1.41 births and immigration is practically non-existent.

At any rate, the facing much the same dilemma. Although the birth rate is more robust (1.88 birth per woman), and immigration more plentiful, the shrinking labor participation rate is mimicking much of the same effects as seen in Japan. The reason for this? The lack of a technically skilled U.S. workforce. The U.S. unemployment forecast 2017 is being serious hampered by this.

For example, The National Federation of Independent Business found that 45% of small businesses they surveyed were unable to find qualified applicants to fill job openings. The Dallas Fed has found businesses also indicate a significant skills gap. Business leaders around the country report shortages of workers for middle-class-wage jobs such as nurses, construction workers, truck drivers, oilfield workers, automotive technicians, industrial technicians and more. When these jobs go unfilled, businesses expand more slowly and growth becomes impeded. This cycle then leads to fewer job openings being presented. (Source: Ibid.)

The increasing presence of automation, as well, will not help the shrinking labor participation much either. This trend is actually quite scary, because for the first time ever, mass automation is poised to take over white collar jobs, instead of strictly mechanical. In prior industrial revolutions, machines and innovations like running water or the internet made labor more efficient, but human minds were still critical for planning and problem solving purposes. But all that is changing now.

Increasingly sophisticated artificial intelligence (AI) is on the cusp of displacing whole industries altogether, since they can perform the mechanical and intellectual tasks needed to run operations. Imagine an AI computer engineer which can code infinitely faster than a human coder; imagine the surgeon who can interpret stimulae on the operating table and remove a tumor with the precision of a Swiss watch; imagine submitting a saliva sample to a vending machine-like apparatus, and receiving a thoroughly acute diagnosis of your medical condition in minutes.

All these innovations are coming, and they’ll be very disruptive to human labor. Newly released research has revealed that between 1990 and 2007, 6.2 jobs were eliminated for every one industrial robot introduced into the workforce. This is just in the industrial sector. (Source: “Six jobs are eliminated for every robot introduced into the workforce, a new study says,” Recode, March 28, 2017.)

Even the people who do manage to keep their jobs may wish they hadn’t. Wages dropped between 0.25% and 0.5% per 1,000 employees when robots were released into a company workforce. This automation trend will not just squeeze more people out of the U.S. workforce, it will act as a wet blanket on wage growth and the labor pool expands. (Source: Ibid.)

Given all of these facts, the Trump administration’s four-percent growth objective is complete fantasy thinking. More likely, a gloomy U.S. GDP forecast 2017 could set in, with increasing pressure on labor as time marches on. One wonders if more job cuts 2017, like the recent firing of dozens of engineers at Boeing Co (NYSE:BA) are automation based, or simply cost cutting measures. The lines will get increasingly blurry as the decade grinds to a halt. Corporate public relations figures might say one thing, when the reality is something completely different.

In the end, the U.S. workforce population will come under increasing pressure from the double whammy of an aging population and the big squeeze from unstoppable automation adoption. But there are things people can do to protect their families. Make sure kids get advanced degrees in hard-to-replace industries as opposed to gunning for a Bachelor of Arts degree or perhaps overweight automation and robotics stocks in your portfolio. There are always strong choices to be made to buffer against any detrimental trend. It simply takes foresight and prompt action.

For the less skilled or investment-poor segment of the population however, the choices they face are much less appealing.

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