The Incredible Shrinking Labor Force
The employment growth report released today by the U.S. Bureau of Labor Statistics was disappointing for sure (74,000 job growth when 200,000 was the consensus estimate) but December employment numbers are more prone to seasonal adjustment errors because of the large amount of hiring that occurs prior to the holidays and this year presented even more issues because of the shortened time between Thanksgiving and Christmas (Thanksgiving was on the 28th, its latest possible date). December’s employment growth may still be disappointing but my bet is that December’s numbers will be revised up in future months. Help wanted ads have been increasing for the past six months and the labor supply/demand ratio has been falling. Unless there is an even bigger “skills gap” than many think, that implies stronger job growth than was reported in December.
The best thing about the report was that it helps focus more attention on the nation’s incredible shrinking labor force, a problem that significantly lowers the potential economic growth of our nation’s economy. Too many media reports on the nation’s and NH’s economy focus almost entirely on the unemployment rate. That is especially true in New Hampshire where, because of our demographics (a lower percentage of harder to employ populations are in our state’s labor force), we always have a lower unemployment rate than the U.S. No matter how weak job growth is in New Hampshire, many will cite our lower than the U.S. unemployment rate as a sign of economic strength. Some reporters (hat tip to John Nolan of the Rochester Times) have avoided confusing job growth with the unemployment rate but too many in our state confuse the two.
The problem of smaller or slower growing labor force is an important and vexing one for New Hampshire and the entire U.S. A smaller or slower growing labor force implies slower economic growth because the output of the economy grows when more people are producing, when more capital (equipment and machinery) allows the same number of people to produce more, or when knowledge/technology/skill levels improve and allow greater productivity per worker. So unless productivity is increasing to compensate, a shrinking or slow growth labor force means slower economic growth.
There are several reasons a labor force can shrink or grow more slowly. Some related to economic conditions, some related to demographics, and some (such as the current situation) seem to have an unexplained element. Nationally, population trends have meant slower labor force growth as lower birth rates over the past few decades and as baby boomers reach ages where labor force participation starts to decline. NH benefited from strong population growth in the 70’s and especially 80’s and 90’s. That provided a strong boost to our economy, especially since much of that pop. growth was the result of in-migration from other states by skilled, well-educated individuals (a good characterization of our in-migrants from other states is a two wage earner, married couple family, probably both college educated with children). That migration added tremendous talent to our labor force and made NH an attractive location for many business looking to employ skilled workers.
The labor force grows or shrinks by population growth in the working age population, or by changes in labor force participation (those of working age who choose to be in the labor market or not). NH and the U.S. have seen slower population growth in the working age pop., but more disturbingly, both have seen a decline in the labor force participation rate. Yes NH still has a relatively higher participation rate but the trend decline is similar to the U.S. The graph below shows the decline in participation among individuals aged 25-64 (to minimize schooling and retirement decisions as possible causes).
If your working age population isn’t growing, having high labor force participation rates is critical for economic growth. NH has had very high participation rates compared to the U.S. because of our favorable demographics (few people who traditionally have lower levels of participation – minorities, those without a high school diploma etc., and because our population overall has higher levels of educational attainment that is associated with labor force participation). Women in NH especially tend to have higher participation because of higher levels of education and lower fertility rates (child-bearing lowers labor force participation). I have written many times on gender and employment (search on gender in this blog) and the “feminization of the workforce” is a theme (non-pejoratively as the father of daughters) I believe is continuing. As the chart below shows, virtually all of the decline in the labor force participation rate in NH is a result of a reduction in the rate among males.
Labor force participation always drops during recessions as workers get discouraged and drop out. What is especially troubling today is that labor force participation continues to be weaker even as the economy has improved. Some has to do with demographics as more of the working age population ages into groups with lower participation rates although participation among those with higher levels of educational attainment seems to have held-up best. The best explanation of why labor force participation has continued to be lower than in the past is that the skills required by the economy have been changing, making many workers less qualified than before and creating more discouraged workers. I think that is part of the issue but I don’t think the “skills gap” could have so abruptly hit the labor market to cause participation rates to fall so much over the last half-decade. The skills gap has been a more slowly growing phenomenon. Among older men without a post-secondary degree, participation has been declining for decades. The skills mismatch between the supply of labor among males and the demand has been ongoing for decades. Did it peak so suddenly in the past decade to create a permanent decline in the male workforce? I don’t think so, additional factors are contributing. I remember in the 70’s when the first real oil crises hit (related to Middle East wars) and a lot of job losses resulted, especially in mill towns like the one I festered in as a youth. Someone whom I thought was wrong about almost everything said to me at that time “a man should never be ashamed of any job he takes to feed his family.” I didn’t think much about that back then, but today it seems especially appropriate, even as it appears to be increasingly a relic of an outdated ethic. Economic conditions today aren’t the result of people not wanting to work and a labor market where many individuals are working at jobs that don’t fully utilize their skills is not desirable. Changes in and the performance of the economy are obviously largely responsible for declining labor force participation. Still, with so many troubling indicators for males – especially younger males (educational performance and attainment, household formations etc.) emerging over the past decade or more , I can’t help wonder how much of the decline is the result of a lost ethic among my gender.