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Historical Labor Shortage Gives Workers a New Edge

Are we entering a new golden era for American workers?

For a couple of years now, workers’ median earnings have been consistently rising at a rate not seen in years.

This may seem unexpected following decades of wage stagnation, when the good jobs of an earlier industrial and manufacturing era — where workers could get a lifelong career on the factory floor and a pension at the other end with nothing more than a high school diploma — have mostly disappeared. In place of those jobs, many workers now have positions with little security, irregular hours, and few to no benefits.

Still, the wage outlook seems brighter by the year. According to the Bureau of Labor Statistics, in the midst of the recession in 2008, the average hourly pay of production and nonsupervisory workers (those who work at a cash register or on a shop floor) was 10% below its 1973 peak (after adjusting for inflation). Since then, wages have recovered almost all of that ground. Median wages for all full-time workers are increasing at a pace last seen during the dot-com boom of the Clinton administration.

And with employers adding 2 million jobs a year, some economists argue that American workers — after being crippled by globalization, automation, a monetary policy that has restrained economic activity in the name of low inflation, and government hostility toward unions and labor regulations — may at last be in for a break.

Yet even as they forecast a brighter future for the working class, economists also express concern that the new age of tight labor markets and rising wages will bring new challenges. As Alan Krueger, a Princeton University economist who was President Obama’s chief economic adviser, put it, “We are heading for a labor shortage.”

Mark Zandi, the chief economist at Moody’s Analytics, agrees. “Our problem going forward isn’t going to be unemployment,” he told me. “Over the next 20 to 25 years, a labor shortage is going to put a binding constraint on growth.”

A number of essential factors are at play, Mr. Zandi noted. The Federal Reserve will likely allow the economy to run “on the hot side.” Years of significantly low inflation have finally convinced the Fed to abandon its anti-inflationary bias, implemented during President Carter’s high-inflation era, and put more emphasis on how high interest rates impact employment.

Many experts presume that manufacturing workers have already lost most all the jobs to globalization that they were going to lose. Rather than “take” more American jobs, hundreds of millions of Chinese workers who have joined the global middle class over the last two decades will instead “create” jobs in the U.S. by purchasing American-made goods and services.

And even as demand for workers increased across the United States, employers are facing the stubborn force of demography: a work force that is growing at its slowest pace in more than 50 years, just as baby boomers who entered the work force from the 1960s to the 1980s now retire.

Over seven years after the recession and the job market began to bounce back, only 60% of Americans over the age of 16 are working, about 2.5% less than just before the economy took a dive.

On average, Mr. Zandi pointed out, aging will cut about a quarter of a percentage point more from the labor-force participation rate — the share of Americans either employed or looking for a job — during the next 10 years. By the end of that period, the labor force may even be retracting.

A Shrinking Labor Force, Despite Rising Wages

Wages are rising in the United States at the most sustained pace since the dot-com boom in the second half of the 1990s. The question is whether rising wages can revive the labor-force participation rate of prime-age Americans, which has shrunk to among the lowest levels in the industrialized world. (IMAGE Sources: Bureau of Labor Statistics; Alan B. Krueger, Princeton University)



Lawmakers who’ve spent their careers considering the lackluster demand for workers must now turn their attention to a predicament they haven’t had to worry about for at least a generation: how to pull more able-bodied people into the workforce to offset a wave of retirements.

“We have had real wage growth, but the labor supply has been flat for the last two years,” Professor Krueger commented. “We get a very small number of workers back with higher wages, just enough to offset the people leaving the labor force because they are older.” The essential question is what other tools are available to pull them back in.

The answer requires dismantling a roadblock impeding the way to this potential golden age: Even if demand for workers is on the rise, those sitting on the sidelines of the labor force may not be the right kind of workers in demand. “The jobs in demand are more skilled than the workers we have,” Professor Krueger explained.

The share of men in the labor force who are in their prime working years — 25 to 54 —has declined steadily since the end of World War II. In addition, workers lacking a college degree have rotated out at increasing rates, as imports and automation cut into their wages.

For years, the economy barely registered this trend because women were entering the workforce in droves, offsetting the declines among men. But that trend flattened out around 2000. Since then, the labor-force participation rate among prime-age Americans has dwindled to nearly the lowest in the industrialized world.

And, as Professor Krueger noted, once workers leave off searching for jobs, it’s difficult to lure them back in. “After they leave the labor market,” he said, “people reorganize their lives.”

This is apparent in some pretty significant ways. One third of the prime-age workers who stepped out of the labor force are now receiving disability benefits, meaning they’ve left for good, Professor Krueger estimated. And then another 20% are currently going through the process of applying for disabilty benefits. In a recently released study, he estimated that about a third of prime-age men not in the labor force use prescription painkillers – namely opiates – suggesting that we can’t expect them to return to work soon. Professor Krueger has even estimated that the jump in opioid prescriptions could account for about 20% of the decline in men’s labor-force participation from 1999 to 2015, and 25% of the observed decline in women’s labor-force participation.

How do we get them to return? In an upcoming study, University of Maryland researchers Melissa Kearney and Katharine Abraham identify forces that have pushed workers out of the labor force prior to the retirement age of 65. Trade is at the top of the list, followed by technology — whether that means robots or other forms of automation — and disability insurance, which gives people income in the absence of a job. Supply-side factors — incarceration, or the impact of the minimum wage on labor costs — are next.

Professors Kearney and Abraham also note policies that might lure more workers back into jobs: expanding access to high-quality education is crucial to prepare students for navigating a changing job landscape. So is availability of affordable child care, which lowers barriers to women’s participation in the work force. Expanding wage supports like the earned-income tax credit will be important to make work worthwhile for workers of lesser skills. On the supply side, Kearney and Abraham suggest being cautious about raising the minimum wage, which some predict may price certain workers out of jobs, and reforming disability insurance to encourage recipients to return to work.

But that’s not all. Discouraging the over-prescription of painkillers appears to be an obvious choice, given Professor Krueger’s findings. There is also a clear list of things not to be done.

For instance, restricting immigration is could be a detrimental policy when workers are scarce. In addition, raising barriers to imports — provoking retaliation from trading partners — is precisely the wrong approach, especially now that workers in cheap labor markets putting pressure on American jobs are positioned to become significant consumers of things made in America.

If the objective is to protect economic growth and to let American workers have a shot at a new golden age of employment, slamming the door on the world economy is not the solution.

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Emery Reddy