If you are like me, you read news stories that attempt to explain the labor shortage in the United States. We read about disengaged workers, difficult bosses, and low pay, etcetera, etcetera.
And while economists can give us insight in understanding the labor market, there is a bigger force at play in the background: demographics.
By analyzing data on births, deaths, aging, and migration, we can better understand today's workforce and the challenges facing us. The big challenge: an aging population. And that puts the financial stability of the U.S. at greater risk due to the decline in our working-age population.
"This is the issue of the future, because this is going to become the first-order issue for all kinds of industries in America," Lant Pritchett, a development economist and RISE Research director at Oxford University's Blavatnik School of Government, told Gaby Del Valle, writing for Business Insider. "They just won't be able to attract workers."
What is Happening
The U.S. is facing shortages in critical positions such as nurses, home-health aides, farm workers, and truckers. Unfortunately, the situation is compounded by a decline in birth rates, which have dropped by almost 20% since 2007.
The fertility rate has been below the replacement level for decades, meaning that the US population could start to shrink unless more children are born. Even if policies encouraging higher birth rates were implemented, it would take years for those children to grow up and enter the workforce.
The US population growth rate has fallen to an all-time low of 0.12% in 2021, and demographic trends show that Americans are getting older, with the median age increasing by about 3.5 years since 2000. The pandemic has only exacerbated this trend, with over a million deaths contributing to the decline.
The Congressional Budget Office predicts that population growth will continue to slow, with any growth by 2042 attributed to immigration rather than births. Deaths are outnumbering births in two-thirds of US counties, leading to a "natural decrease."
What all this boils down to is that the proportion of individuals within the working-age bracket (15-64 years) in the American population has decreased, dropping from a peak of 67.3% in 2007 to 64.9% in 2021. Moreover, the number of people who rely on the working-age population has grown since 2010 and this trend is expected to persist.
The aging of the baby boomer generation is significantly impacting the age structure of the country. The baby boomers were born between 1946 and 1964, and their birth rate spiked following World War II. Over half a million babies were born in the single year between 1945 and 1946.
The baby boomers are now retiring, with the youngest among them eligible to access their retirement savings, and most able to claim Social Security. While not all baby boomers will retire, it is estimated that 90 percent will have stopped working by 2030.
Furthermore, there has been a decline in birth rates. Since 2007, the total fertility rate in the US has remained below replacement levels and has continued to decrease. This means that the current generation of 15-year-olds, who are just entering the workforce, were born during a period of reduced births in the US. As a result, the US is entering a protracted phase where fewer young Americans are available to replace those who are retiring.
Our Mortality Rate is Increasing
Death rates for both younger and older adults have been on the rise since 2010, with causes including drug overdoses, alcohol, suicide, diabetes, and health conditions related to obesity. The COVID-19 pandemic has further contributed to this trend, leading to an estimated 58 excess deaths per 100,000 individuals aged 15-64 in 2020 alone.
Moreover, the long-term effects of COVID-19, known as long COVID, continue to impact labor force participation. Research suggests that as many as 1.6 million full-time workers may be unable to work due to lingering symptoms from the illness. Individuals with disabilities generally have lower rates of labor force participation, due to reasons such as discrimination, lack of accommodations, or other factors, and as of 2021, 10.1 million Americans with disabilities were not part of the labor force.
Our Immigration Policies
This labor shortage is already impacting the economy, which is why many demographers, economists, and business executives are advocating for increased immigration as a more immediate solution to fill the gaps.
President Joe Biden's economic advisors have even suggested that more legal immigration is needed to boost the economy. However, immigration remains a politically sensitive issue.
But the reality is that immigration has historically been a key driver of population growth in the US, and it is expected to become even more important in the future.
Between 2010 and 2018, immigrants and their US-born children contributed to 83 percent of labor force growth, making up 28 percent of all US workers. In addition, foreign-born women tend to have higher birth rates than their US-born counterparts, which has contributed to the growth of the next generation of workers.
However, the growth of the working-age population has been stunted by recent immigration policies, which have created systemic backlogs and increased processing delays. The COVID-19 pandemic has also added to these delays, as well as border restrictions that were implemented in 2020-2021, nearly halting international movement.
Despite these challenges, there are signs that international migration is starting to pick up again. The US added over 1 million people between 2021 and 2022, with immigration being the primary reason for population growth in 2022. While this may not address short-term worker shortages, it could help to stimulate future growth in the labor force.
Last week, the United States ended Title 42, a pandemic-era rule that allowed for the rapid expulsion of migrants from the country. On it's eve, an increased number of migrants arrived at the U.S.-Mexico border. The Biden administration is now implementing a combination of new and old border policies aimed at managing and deterring border crossings, while providing limited legal pathways for asylum seekers.
Despite these measures, the strength of the U.S. economy is what drives people to migrate to the U.S. They are seeking a better, and many migrants come to the U.S. because employers in the country seek them out, according to leading migration expert Dilip Ratha of the World Bank Group.
While President Biden's efforts may help to mitigate migration flows, the draw of economic opportunities in the U.S. will likely continue to bring migrants to our borders. And it's been that way for decades and will likely persist for decades.
Other Complicating Policies
The US has long struggled with policies that hinder full participation in the labor force. While demographics such as birth, death, and migration play a role in labor force dynamics, policies also have a significant impact. Unlike its peer countries, the US lacks comprehensive family-friendly policies, which impede workers, particularly women, from participating fully in the workforce.
This issue was exacerbated during the COVID-19 pandemic when working mothers had to leave their jobs to care for their young children due to school and daycare closures.
In addition to family-friendly policies, employer policies also play a crucial role in workforce participation. The end of remote work, for example, may have negative consequences for people with disabilities who experienced expanded opportunities during the pandemic.
Certain hiring policies, such as those that exclude justice-involved individuals, limit the pool of available workers and exacerbate the problem. Overall, addressing these policy gaps is critical to achieving full labor force participation and promoting inclusive economic growth in the country.
Bottom Line
The financial stability of the United States is at risk due to the decline in the working-age population. This demographic trend is a critical concern for policymakers responsible for economic and monetary policy decisions. It is crucial to consider long-term population dynamics when making such decisions.
Additionally, payroll taxes, which contribute to nearly one-third of the federal budget's revenue, are at risk due to a shrinking labor force. Social Security is a prime example of the impact of this demographic trend. Payroll taxes fund 90 percent of the retirement benefits paid to retirees.
However, the number of workers supporting each retiree has decreased from 5 in 1960 to a projected 2 by 2040. The current rate of decline in the working-age population jeopardizes the future financial health of the country.
With fewer people to pay into Social Security to support the growing number of retirees and fewer workers in critical industries, including healthcare and agriculture, a declining population would have devastating consequences for the American economy.
The economy is driven by people, and without a sufficient pool of workers, the labor market could remain tight for an extended period. Policymakers must address the root causes of the decline in the working-age population, including immigration policies and lack of family-friendly policies, if we are to ensure future economic growth and financial stability.
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