A recent article in the Wall Street Journal describes the long-term decline in the size of the US workforce and its implications for long-term growth.
[Sweeping] demographic and societal changes were driving down the participation rate long before the recession took hold. Young people are starting work later as more of them go to college. The flood of women into the workforce, which drove the participation rate up sharply in the second half of the 20th century, has slowed. Most significantly, the over-55 population is growing at more than three times the rate of the adult population as a whole. Even as people retire later, Americans over 55 are still half as likely to be in the workforce as those between ages 25 and 54.
The article points out that this decline could actually be good news for those currently unemployed, making it easier for them to find work. But the long term implications for the US economy are mixed:
Paul Ashworth of the forecasting firm Capital Economics notes that over the long term, two things drive economic growth: more workers, and more productivity from those workers. From 1950 to 2000, the labor force grew at an average rate of more than 2.5% per year. Since then, it has grown at a rate of less than 1%. Meanwhile productivity, as measured by output per hour per worker, has recently been growing at an annual rate of around 1% as well.
Add those up and you get a long-run growth rate of 2%—exactly the pace of growth in the third quarter, according to data released on Friday. Much has been made of the sluggish pace of growth in the recovery. But without a boost in productivity, demographic trends suggest this may be as good as it gets.
As often is the case, it all comes down to the prospects for long-term productivity increases in the US economy. In the past, that was something that could be taken for granted. But as we pointed out in an earlier post, economist Robert Gordon has raised doubts about the ability of the US economy to support long-term productivity increases, though his work is much debated in economic circles. (Click on the graph above to see the long-term slowing of productivity growth since 1969.)
Time will tell. . .