Mark Zandi, the chief economist at Moody’s Analytics, concurs. “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.”
Converging factors are at play, Mr. Zandi contended. The Federal Reserve is likely to allow the economy to run “on the hot side.” Years of exceptionally low inflation have finally convinced the Fed to drop its overriding anti-inflationary bias, forged in the high-inflation era of President Jimmy Carter, and to put more weight on the impact that high interest rates have on employment.
Manufacturing workers have probably already lost all the jobs to globalization that they were going to lose, Mr. Zandi said. 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 United States by buying American-made goods and services.
And even as demand for workers accelerates across the United States, employers must contend with the unflinching force of demography: a work force that is growing at its slowest pace in over a half-century, as baby boomers who joined the labor force from the 1960s to the 1980s now gradually age out of it.
More than seven years after the recession ended and the job market began to bounce back, only 60 percent of Americans over the age of 16 are working, about 2.5 percentage points fewer than just before the economy took a dive.
On average, Mr. Zandi pointed out, aging will slice about a quarter of a percentage point from the labor-force participation rate — the share of Americans either employed or looking for a job — over the next 10 years. By the end of that period, the labor force may even be shrinking.
Policy makers who spent their careers pondering the lackluster demand for workers will have to turn their attention to a problem they have not had to fret about much in at least a generation: how to pull more able-bodied people into the work force 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 said. “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 critical question for policy is what other tools are available to draw them back.
And the answer requires removing a roadblock standing in the way of this potential golden age: Even if demand for workers is rising, it may not be for the kind of workers on offer, those sitting on the sidelines of the labor force. “The jobs in demand are more skilled than the workers we have,” Professor Krueger told me.
The share of men in their prime working years — 25 to 54 — who are in the labor force has declined steadily since the end of World War II. Workers without a college degree have clocked out at increasing rates, as imports and automation undercut their wages.
For years, the economy hardly noticed because women were rushing to work in droves, offsetting the retreat among men. But that trend faded around the turn of the century. Since then, the labor-force participation rate of prime-age Americans has shrunk to nearly the lowest in the industrialized world.
And, as Professor Krueger noted, once workers stop looking for a job, it is tough to draw them back in. “After they leave the labor market,” he said, “people reorganize their lives.”
Indeed. A third of the prime-age workers who have left the labor force are now receiving disability benefits, meaning they are out for good, Professor Krueger estimated. Another 20 percent are in the process of applying for such 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 they will not be returning to work soon. Professor Krueger suggests that the increase in opioid prescriptions could account for about 20 percent of the decline in men’s labor-force participation from 1999 to 2015, and 25 percent of the observed decline in women’s labor-force participation.
How to get them back? In a coming study, Melissa Kearney and Katharine Abraham of the University of Maryland identify forces that have pushed workers out of the labor force before the retirement age of 65. Trade is at the top of the list, followed by technology — be it robots or other forms of automation — and disability insurance, which offers people some income in the absence of a job. Supply-side factors — incarceration, or the effect of the minimum wage on labor costs — are next.
Professor Kearney and Professor Abraham also identify policies that might draw more workers back into jobs: Improving access to high-quality education, an elusive goal despite recent gains, is critical to equip students to navigate a changing workplace. So is access to child care, to lower 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, Professor Kearney and Professor Abraham suggest that being cautious about raising the minimum wage, which could price some workers out of jobs, and reforming disability insurance to encourage recipients to seek jobs.
There is more. Discouraging the overprescription of painkillers seems like 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 not the smartest policy when workers are scarce. Raising barriers to imports — inviting retaliation from trading partners — is exactly the wrong approach, especially now that the workers in cheap labor markets that put such pressure on American jobs promise to become big consumers of things made in America.
If the goal is to protect economic growth and to give American workers a shot at a new golden age of employment, closing the door on the world economy is not the solution.