Pethokoukis, Economics, U.S. Economy

Why slowing US labor force growth is bad for US economic growth

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Recall this bit from the recent Obama budget:

In the 21st Century, real GDP growth in the United States is likely to be permanently slower than it was in earlier eras because of a slowdown in labor force growth initially due to the retirement of the post-World War II baby boom generation, and later due to a decline in the growth of the working age population.

That gloomy prediction is reinforced by this new BLS analysis:

Projections of the labor force and the aggregate economy serve as the basis for employment projections. Slower projected growth in the civilian noninstitutional population and declining labor force participation rates limit growth in the labor force, which in turn limits economic growth.

The labor force is projected to grow 0.5 percent per year from 2012 to 2022, compared with an annual growth rate of 0.7 percent during the 2002-12 decade. Due to the aging baby-boom generation, workers ages 55 and older are expected to make up over one-quarter of the labor force in 2022.

Projected declines in the labor force participation rates for both men and women are expected to slow labor force growth. The overall labor force participation rate is projected to decline from 63.7 percent in 2012 to 61.6 percent in 2022, continuing the trend from the past decade.

Slower labor force growth is expected to limit potential economic growth. Gross domestic product (GDP) is projected to increase by 2.6 percent annually from 2012 to 2022, slower than the 3 percent or higher rate often posted from the mid-1990s through mid-2000s.

Here is the  math: US GDP growth has averaged 3.3% over the past 50 years, with roughly half coming from a growing labor force (1.6%) and half coming from higher productivity (1.7%). But annual labor force growth slowing, productivity will have to increase if the US is going to avoid a slowdown. The McKinsey Global Institute thinks a higher retirement age and smarter immigration policy could boost labor force growth to 1%. But even then, productivity growth would have to increase to 2.3% long term just to maintain that historic growth rate. That won’t be easy.

And hitting that 1% labor growth target won’t be easy, either. For instance: Here is what McKinsey says about bumping up the labor force participation of women:

McKinsey Global Institute

McKinsey Global Institute

Other policy options for boosting labor force growth overall include Social Security reform, wage subsidies, and higher immigration.

Follow James Pethokoukis on Twitter at @JimPethokoukis, and AEIdeas at @AEIdeas.

2 thoughts on “Why slowing US labor force growth is bad for US economic growth

  1. I’ve never quite grasped the need to grow the labor force as well as Larry Kudlow’s position that we need to get more legal immigration to grow the labor force.
    For crying out loud, we have 10s of millions out of work already. People who want to work.

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