Change is Coming!

The next few decades will bring major changes in the US labor market. The growth rate will slow and the labor force will become older and more diverse. The percentage of the population which is working will also continue to fall. The implications for businesses, the economy, and society are profound. Let’s look at a few of the major trends.

Population growth will slow. There are two components of population change: the natural rate of increase (which is births minus deaths among the resident population) and immigration. The total growth rate is expected to drop from current levels of more than 0.8% per year to little more than half that rate in the future. Within the next few years, immigration will become the larger source of population gains due to aging and decreasing fertility rates. By the mid-2040s, the US Bureau of Labor Statistics (BLS) is predicting that about 80% of US population growth will be due to immigration.

The labor force is projected to expand even slower. The civilian noninstitutional population is projected (by BLS) to grow from 251 million in 2015 to 326 million in 2060 (an increase of 75 million); however, the labor force is projected to increase from 157 million in 2015 to 186 million in 2060, an increase of only 29 million.

Labor force participation will continue to decline. The labor force participation rate measures the number of people age 16 or older who are either working or have looked for work in the past year as a proportion of the total population age 16 or older. In 1950, more than 86% of the US male population age 16 and over was part of the labor force, but the proportion has fallen steadily since that time to about 69% now. In 1950, less than 34% of women 16 or older were participating, but the proportion of women in the workforce grew rapidly in the following decades and peaked at roughly 60% in the late 1990s and early 2000s. The peak for the overall labor force participation rate was approximately 67% in the late 1990s and now stands at around 62%.

By the late 2020s, BLS predicts that only about 60% of Americans 16 and older will be part of the labor force, with the proportion dropping to only 57% by 2060. There are multiple reasons for this decline. Years of slow hiring lead some people to drop out of the workforce, never to return. Skills mismatches between unemployed workers (and people who might consider looking for work) and available jobs are another issue.

Demographic patterns are also contributing to lower participation. The baby boom generation has been a large share of the labor force, but is now aging beyond prime working years. The oldest boomers began to reach retirement age several years ago, with many more in the age ranges which typically have much lower participation rates. As more of the baby boomers retire, there will be additional downward pressure on overall participation rates.

Social changes and choices are also affecting the overall participation rate. Young people (ages 16 to 24) are less likely to work than in the past, with school the most commonly cited reason among those choosing not to work. Even among people in the prime working age range of 25 to 54, which has the strongest attachment to the labor market, the labor force participation rate is falling.

The US population will continue to age, driven by the aging of the large baby boom generation, as will the workforce. Between 2015 and 2060, BLS predicts that the percentage of workers age 55 or older will increase from 22% to 27%. Workers in the age 16-24 category will drop from 13% of the total to 10% (due in part to the increasing emphasis on higher education, which is a good thing).

Shifts in race and ethnicity will continue. Nationally, the share of non-Hispanic whites will drop from about 64% in 2015 to 46% in 2060. Hispanics will be an increasingly important component of the US workforce, rising from less than 17% in 2015 to 30% in 2060. In Texas, these patterns will be even more pronounced.

How will we get the work done? Immigration reform can be a part of the solution (as I discussed in a recent column). There may be ways to entice more prime working-aged people back into the labor force, but dropping labor force participation is likely going to be a fact of life for the foreseeable future. Technological advances will also continue the shift from labor to capital, with machines taking on increasingly complex tasks.

There are other social issues arising from these shifts, such as the fact that there will be fewer workers as a proportion of the population, which affects social programs such as social security. Encouraging higher education among all racial and ethnic groups will be essential, as will ensuring that additional training is within financial reach. Slower workforce growth is coming, and it’s something we’re going to have to deal with as a society. No matter how appealing it may be to some, the laws of biology will not allow us to harken back to or wax nostalgic about a different time and different circumstances. Reality is going to compel forward-looking solutions.