A Perfect Labor Force Storm
A perfect storm is brewing for the economy and individual businesses in NH and across the country. Slow labor force growth, the retirement of baby boomers, and weak growth in labor productivity are severely limiting the productive capacity of the nation’s economy. Between 2010 to 2015 labor productivity in the U.S. increased by just 0.5 percent on average annually, and the labor force by an average of just 0.4 percent. Since the end of World War II, the combined, labor productivity and labor force growth in the U.S. had never fallen below 1 percent – until 2015 when it was just 0.9 percent. I have written about the the limits labor force growth place on the U.S. and NH economies here and here (and others). Factors such as the flow of population (state-to-state migration and international migration), and changes in labor force participation rates will play a large role in determining which states and regions are most affected, but a real possibility exists that the economies of some states and regions could shrink over time.
A quick assessment of the potential impact of baby boom retirements across the country is illustrated in Figure 1 which shows the ratio of the population in each state that will (or could) be entering the labor force approximately over the next decade – that is individuals currently ages 5-19 – to those who will (or could) be exiting the labor force – individuals currently ages 50 to 64. The bars in the graphic that fall below zero indicate states that face more retirements from their labor force than new entrants over the next decade or more. As the chart shows, the labor force in New England and much of the Northeast will be especially challenged by baby boom retirements as far more individuals will leave than enter the workforce.
In NH, the impact of baby boom retirements will vary greatly by industry. The Millennial generation will soon be the largest segment of the labor force but their distribution across industries varies greatly. For this analysis I examined the demographic characteristics of each industry’s workforce in NH. Figure 2 presents the ratio of early career (age 25-34) to older workers (age 55-64) in major industry groupings in NH. The graph suggests industries that will be more and less challenged by retirements of the baby boom generation. Industries that have higher ratios employ more individuals early in their working lives than individuals nearing retirement age. Several industries stand out for the high percentage of older individuals in their workforce. Manufacturing is one industry that has had difficulty attracting younger workers and I have written about that issue long ago in this blog, Educational services is another. Professional, scientific, and technical industries have a surprisingly low percentage of younger workers but an examination of this industry grouping at a more detailed level shows that the legal profession has among the oldest demographics of any industry in the state.
Looking at the age composition of workers in broad occupational groups in NH (Figure 3) shows how much difference there is across different occupations employed in professional, scientific, and technical industries. The ratio of younger to older workers in the legal profession is just 46 percent, while in computer and mathematical occupations there are many more younger workers and the ratio is 127 percent.
Health care is also a field with a larger percentage of older individuals in the workforce but when the demographics are examined at a more detailed industry level or by specific occupations, it is clear that the industry is bifurcated – with physicians and other health care practitioners having an older demographic while many of the support occupations in the industry that have emerged as health care has become a much larger portion of the economy, have a much younger demographic.
Industry Growth is as Important as Industry Demographics
The retirement of baby boomers only hints at the industries that could face the most significant labor shortages over the next decade. Retiring workers may need to be replaced but they may not. If employment in an industry shrinks or if it grows slowly over the next decade, then labor shortages are likely to be less severe than baby boomer retirements would suggest, even in industries with a higher percentage or older and retiring workers.
To capture the impact of industry trends on potential labor shortages related to baby boom retirements I combined projected industry growth in NH over the next decade with the ratio of younger to older workers in each industry to produce a supply/demand balance metric. For illustrative purposes I present the supply/demand calculations for broad industry groupings in Figure 4. I did the same calculations at a more detailed (50+ industry) level but that level of detail is not amenable to presentation in a single graphic. It is not possible to know what industries workers entering the labor force over the next decade will work in so these calculations are only rough estimates of potential supply/demand imbalances. As the chart shows, industries with a relatively older workforce, such as manufacturing, public administration, and utilities, will nevertheless likely confront fewer labor shortages because of slower employment growth in those industries. Unfortunately, all industries are likely to face shortages in some occupations that are employed and in demand across many industries.
What Can States and Business Do?
The primary shortcoming of Figure 1 is that it is a static representation of the demographics each state’s workforce. The population and demographic composition of states are not static however. People move from place-to-place, state-to-state, county-to-county, and country-to- country. A state or region with substantial labor shortages that is also viewed as an attractive location can see increases in labor supply in response to labor shortages and wages that are rising in response to shortages. For more than two decades attracting skilled individuals with higher levels of educational attainment has been a key to NH’s economic success, since the mid 2000s however, NH has seen fewer individuals moving into the state from other states.
A popular meme in NH (and in many rural states) is that the state’s labor force challenges are largely the result of young people leaving the state. But that is a phenomenon that has been occurring for decades in NH as it has in other rural states. While it plays some role in the state’s labor force challenges, it has not been a key factor contributing to or detracting from NH’s economic performance – either NH’s strong successes of the 1980s and 1990s or its subpar job growth of recent years. I wrote about who is moving to NH here, the chart below adds who (from an age perspective) left NH during the same recent 5 year time period.
I am not arguing that we ignore the issue of out-migration of youth, but a state budget in surplus along with the “migrating youth” meme is likely to produce proposals for labor supply policies that are likely to be as costly as they are ineffective. In future posts I will examine the costs and benefits of several labor supply policies directed at increasing the percentage of young people in NH as well as the percentage attending college and remaining in NH after graduation. NH is not monolithic, some communities and regions have been attracting younger workers and the age structure of their labor forces has not been increasing as rapidly as NH overall. If policymakers want to attempt to change decades of youth migration trends then these communities are instructive of the types of actions that may or may not help NH capture higher numbers of workers early in their working lives.
Still, migration along with changes in the labor force participation rate among different demographic groups are going to be the primary determinants of the magnitude of NH’s labor force growth in the coming decades. As Figure 6 below shows, net migration from other states (the # moving in versus the # moving out) has been negative in recent years. That is largely the result of a slowdown in people moving to NH rather than a substantial increase in those leaving the state. The chart also shows that net international migration has offset much of the recent loss from state-to-state migration.
International migration of foreign workers into NH has played a critical role in meeting the demand for many occupations in NH. Overall just under 8 percent of the labor force in NH is foreign born but in some occupations such as computer and mathematical occupations and life and physical sciences occupations, the percentage of foreign born workers in the NH labor force is over 20 percent (Figure 7).
The projections of labor supply/demand imbalances in this post don’t account for potential increases in domestic or foreign migration but each of these will play an important role in meeting the demand for labor in the Granite State. Businesses have little control over net migration to NH so what can businesses do in the face of impeding labor shortages? Here are some possible strategies to help businesses meet their labor needs in an era of slow labor force growth:
- Increase Wages and Pass Costs on to Consumers
- Expand Automation and Increase Productivity
- Move to Areas with More Labor
- Increase Teleworking to Expand Potential Labor Pool
- Tap the Untapped Labor Pools
- Provide Incentives to Delay Retirement
- Rely More on Contingent Workers
- Recruit (and Train) Discouraged Workers.
These strategies are not available to all businesses or all industries. Of all, I like providing incentives to delay retirement the best – it is the “revenge of the baby boomers”. More occupations today are less physically demanding and older citizens are healthier than any time in our nation’s history. Combined, this should allow individuals to work (if they so chose) well beyond traditional retirement years. For a long while now younger workers have been all the rage. It is fitting that baby boomers who entered the workforce in numbers large enough to depress wages, and who have seen workplace cultures that increasingly look to appeal to the youngest workers, could see increasing demand for their services at the end of their working lives.