Roots Of America’s Labor Shortage

Next to rising costs, the biggest complaint from American business is the shortage of workers. According to surveys conducted regularly by the Institute of Supply Management, unmet labor needs have held back general growth prospects. Wage rates have risen, not enough to outpace inflation but presumably enough to draw more people into the workforce or at least the search for work. They have done so, but still proportionately fewer Americans participate in paid work than historically. The Labor Department’s so-called participation rate – the percent of the civilian population either working or seeking work – remains lower than before the pandemic and significantly lower than a decade ago.

Some have attributed this drop in worker participation to the shocks of first the great recession of 2008-09 and then the pandemic. Those with a moral turn of mind have attributed it to a loss of the work ethic among the younger generation. Without disputing either of these explanations, falling participation rates mostly reflect something much more prosaic but nonetheless more significant and more persistent. More than anything else, the nation’s labor shortage reflects retirements among the now aged baby-boom generation. Since that demographic root is hard to remedy quickly and will likely have a lasting effect on the American workforce, the economic constraints imposed by a worker shortage will remain a reality for some time to come.

Figures released regularly by the Labor Department clearly trace the decline in participation. Some 15 years ago, about 67% of the civilian population were either working or actively seeking work. This percentage began to fall in 2010 and by 2016 reached a figure below 63%. Stated in percentages, this seems like a small change, but in a population of just under 350 million, this drop in participation effectively denied the economy some 14 million workers. It is little wonder then that the economic recovery during those years proceeded as slowly as it did. Participation rates picked up marginally as economic growth accelerated between 2016 and 2019 but then plummeted during the pandemic, hitting a low of less than 62% in 2020. Rates have picked up since to 62.4% but remain a full percentage point below the late 2019 level, a loss of just under 3.4 million workers. It is little wonder business is complaining.

The impact of boomer aging and hence retirement is also clear in the Labor Department figures. The huge baby-boom generation was born between the years 1945 and 1962. Those born at its beginning began retiring as they approached 65 in 2010, and since, an increasing number of boomers has retired, a trend that not only explains the decline in participation but also its beginning right after the 2008-09 recession. As more and more boomers aged, the proportion of the U.S. population of retirement age rose, from 13% in 2010 to 16.5% in 2020. More were dropping out of the workforce than entering it.

Participation declines certainly have little to do, as some have asserted, with a general decline in people’s interest in work. On the contrary, every age category showed a rise in participation. The teen rate rose during the past year, for instance, from 36.1 percent to 36.9 percent. People between the ages of 20 and 54, the backbone of the workforce, increased their rate rise from 81.3 percent to 82.5 percent. Even older Americans increased their participation in the workforce. The rate for those over 55 rose from 38.2 percent to 38.9 percent. But even as each group increased its participation, the relative growth of older groups, which for obvious reasons have a lower participation rate than younger Americans, has held down any gains in overall workforce participation.

This demographic weight on the nation’s available workforce will almost certainly persist. Those born in the later years of the baby boom will increasingly seek to exit work during the next five or six years. Since more were born in the later years of the boom than the early years, the worker shortage should intensify as the decade proceeds. Because the economy moves in cycles, the pressure will undoubtedly develop unevenly, but on balance, the demographics promises that this participation matter and the worker shortage it creates will get worse, not better over time.

Nor is there much the economy can do to alleviate this pressure. A higher rate of women’s participation might help. Because women pursue paid work at a lower rate than men – 58.0 percent compared with 70.5 percent – there would seem to be room for women in the right circumstances to raise their participation and give the economy the working hands and minds it needs. Immigration could help, too, though to do much good, it would have to be of the sort that can replace the relatively well-educated, and well-trained baby boom generation. Unless these mitigators go far beyond what is reasonable to expect, the labor shortage seems likely to continue for quite a while yet.