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ESSAYS ON ISSUES THE FEDERAL RESERVE BANK OF CHICAGO JANUARY 1990 NUMBER 29 Chicago Fed Letter W here will we get the workers? New jobs are a sign of a healthy, growing economy. Some 21 million jobs have been created in the U.S. since the present expansion began in November 1982. As a result, the U.S. unemployment rate, which hit 11.2% in the first quarter of 1983, has been hovering at 5% to 5.5% for the past year or so. This rate is close to the “ natural rate” of unemployment— the rate that will occur even in a fullemployment economy because of job changes and other factors. But filling new jobs is only partly a m atter of rehiring the unemployed. It is also a question of demographics. There needs to be a constant stream of new workers to maintain a grow ing economy. For example, Figure 1 shows that since 1984 the bulk of employment gains have come from new workers who have entered the labor force, not from the pool of the unemployed. This Chicago Fed Letter looks at demographic trends and the problems and opportunities that the changing U.S. population will pres ent in the next 20 years or so. Population growth is slowing The continued economic expansion and the concurrent decline in unem ployment has reduced the num ber of unemployed people available to fill the jobs created by additional growth in the economy. Increasingly those people must come from additions to the labor force, ordinarily people who have reached working age, usu ally about age 20. But at the same time that the unem ployment rate has been declining, the rate of population growth in the U.S. has also been decreasing. Al though the U.S. population will grow over the next 20 years, the rate of growth will continue to decline as it has over the last four decades. Thus, the average annual rate of popula tion growth— 1.79% between 1950 and 1960—should be no more than 0.5% between 2000 and 2010. 1*Who got the new jobs millions of jobs 5 --------------------- the growth in population but also on the rates oflabor force participation. During the last two decades, the in crease in participation in the labor force by women has added substan tially to the available labor supply. The labor force participation rate for men, 16 and over, was 79% in 1972, while that for women in the same age group was 44% (see Figure 3). Since then the rate for men has declined slightly to 76% in 1988, while that for women has been steadily increasing so that it is now 57%. By the year 2000, the participation rate is pro jected to reach 62% for women and 75% for men. Thus, the projected increase in the growth rate for women in the labor force for the next 12 years is less than half that of the past 16. This slow down will reduce the growth in the available labor supply. Fewer entry-level workers 1983 1984 1985 1986 1987 1988 The slower rate of population growth will affect the size of the available labor force. Between 1970 and 1980, the num ber of persons in the 20-to64 age group, i.e., the potential work force, was increasing at an annual rate of 1.93% as a result of the postWorld War II “ baby boom .” This age group is projected to increase only at an annual rate of 0.78% be tween 2000 and 2010 (see Figure 2). Participation rates are converging The future supply of labor in the U.S. depends, of course, not only on One early effect of the decline in the growth rates of the potential work force has been the increasing diffi culty in recruiting entry-level work ers. These are primarily people in the 18-to-24 age group. There has been a substantial decline in the num ber of persons in this age group nationally in the 1980s. This decline will continue during the ’90s. After the year 2000, the num ber of persons in this age group should increase as the children of the “ baby boom ” parents—the “ echo boom ” as some have called it—reach this age group. The ongoing decline in the rate of population growth for the 18-to-24 age group means that there will be 2. Fewer workers in the pipeline ___________ J 3.0 annual percent change of U.S. population by age group ------------------------------------------------------------------------------1970-80 1980-90 1990-00 difficult to project and additions to the labor force from this source are generally uncertain. Demographic projections of increases in the illegal com ponent of immigrant labor are, of course, even cloudier. Slower growth in Seventh District 2000-10 under 20 years fewer people available for entry-level jobs. In addition, an increasing per centage of high school graduates attend college. Although such people eventually become part of the labor force, the delay tends to slow the labor force growth rate in the short run. More older workers In recent years the general trend has been toward a decrease in the aver age retirem ent age, particularly for men. For some this has been a vol untary decision, made possible by adequate financial resources. In some cases, companies have offered early retirem ent to their older em ployees, generally in cost-cutting and restructuring moves. Labor force participation rates for men ages 55 to 64 reflect this trend. In 1980 the participation rate was 72.1% for men in this age group, but by 1988 it had declined to 67.0%. For women in the same age group, however, the participation rate has continued to increase. In 1980, the participation rate was 41.3% for women in this age group. By 1988, it had risen to 43.5%. Partly this re flects the general increase in labor force participation rates for women. However, in many cases, women have not been in the labor force as long as their male counterparts. Thus, they 20-64 years 65 years and over have not acquired sufficient pension benefits to fund a comfortable early retirement. Labor force participation rates for both men and women over 65 years of age were declining until 1985 but have turned up since then (see Fig ure 4). Although it is too early to be certain, this may be an indication of the developing need to augment our labor supply through the increased use of older workers. Uncertain number o f immigrants Employment opportunities in the U.S. have always been attractive to residents of less affluent countries. As a result, immigrants to this coun try have been a continuous source of labor supply. As the rate of growth in the labor force slows, there is no doubt that immigrants will continue to flow into the labor pipeline. Population projections recognize the additions to the growth in popula tion from immigrants from other countries. In general the projections are based on the assumption that past trends in numbers and destina tions within the United States will continue. It is possible that as growth in the domestic supply of labor slows more immigrants will come to the United States than in the past. However, the actual increase is Growth in the supply of labor in Seventh District states—Illinois, Indi ana, Iowa, Michigan, and Wiscon sin—is likely to be even slower than that nationally. As a result, if present trends continue, employment growth in the District will probably be less than that experienced in the rest of the U.S. Recent population projections by the Bureau of the Census indicate that the level of population in all of the District states will be declining after 1990. Between the years 2000 and 2010, the average annual rate of decline of population is projected to range from - 0.07% in Illinois to - 0.68% in Iowa. The projected declines in the Mid west population after 1990 will re duce growth in the size of the poten tial work force. In Iowa, the num ber of persons in the 20-to-64 age group is expected to be declining between 1980 and 2010. In the other states in percent (work force participation rate) 90 ----------------------------------------------------W om en j_______i --------- 1--------- 1-----1972 1979 1988 2000 the District, the potential work force will show only slight growth. 4. Older workers: an available resource percent (work force participation rate, ages 65 and over) Policy options Projections of the future labor force based on growth rates in the popula tion and participation rates strongly suggest that the labor supply will increasingly act as a constraint on the expected employment growth over the next 20 years. A continuation of past trends in economic growth will therefore increasingly require more productive use of the existing supply of labor. Training for the usual labor force age group—ages 18 to 65—becomes even more im portant if we are to increase productivity. Continuous upgrading of skills is necessary to incorporate new techniques for pro duction and management. Young people who drop out of high school before graduation are a po tential source of workers, particularly for entry-level jobs. However em ployers may increasingly find it nec essary to provide on-the-job training as a substitute for the education that they did not receive in high school. This is also true for those high school graduates who do not receive an adequate basic education in high school. Indeed, there are many indi cations that businesses already recog nize the need to address such educa tional deficiencies. The projected decline in population of the 18-to-24 age group, which is the primary source of workers, man dates that older workers should be encouraged to continue working if overall employment levels are to continue to grow. To make the most productive use of these employees, training and promotion opportuni ties will need to be provided. Not only should older workers be retained, but growth of the popula tion in this age group suggests that the older age group would be a likely source for the recruitm ent of work ers. They generally offer the advan- Men W om en 1980 1981 1982 1983 1984 tages of long experience and limited family obligations. Recent legislation raised the future age for retirem ent with full Social Security benefits. It also increased the amounts which Social Security beneficiaries could earn up to age 70 without losing their benefits. Although the general intent of the legislation was to maintain the sol vency of the Social Security system, a side effect could be an increase in the available labor supply. Certainly, delaying the retirem ent age and encouraging employment by older workers, even part-time, by permit ting them to keep a larger portion of their earnings contributes to growth in the labor force. But, if employers are to make full use of their workers, training and promo tion opportunities should be made available to all workers regardless of age. All too frequently, younger workers are encouraged to continue their education while working, at their employers’ expense, and then leave for other positions with their new skills. The older worker who is more likely to stay with the company may be less likely to receive such encouragement. Immigrants also represent a potential addition to the labor supply. Produc 1985 1986 1987 1988 tive use of their skills may require not only the usual education and training, but also require specialized education in language skills. The demographic trends now be coming apparent suggest that in the 1990s U.S. business will have to give more emphasis to human capital investment. Failure to respond crea tively to the nearly inexorable changes in the population structure and labor supply will place American business at a considerable disadvan tage to our global competition. —Eleanor H. Erdevig Karl A. S cheld, S en io r Vice P re sid en t a n d D irecto r o f R esearch; David R. A llardice, Vice P re sid en t a n d Assistant D irecto r o f R esearch; E dw ard G. N ash, E ditor. Chicago Fed Letter is p u b lish e d m o n th ly by th e R esearch D e p a rtm e n t o f th e F ed eral Reserve B ank o f C hicago. T h e views ex p ressed are th e a u th o rs ’ a n d are n o t necessarily th o se o f th e F ederal Reserve B ank o f C hicago o r th e F ederal Reserve System. A rticles may be re p rin te d if th e so u rce is c re d ite d an d th e R esearch D e p a rtm e n t is pro v id ed with copies o f th e rep rin ts. Chicago Fed Letter is available w ith o u t ch arg e from th e Public In fo rm atio n C e n te r, F ed eral Re s e n e Bank o f C hicago, P.O. Box 834, C hicago, Illinois, 60690, (312) 322-5111. ISSN 0895-0164 — MMI — Midwest Manufacturing Index: Current e I I I I 1 .1— —L 1.J — L L, 1984 i i i i i i i I i i i i i i i i i i < I i i i ............................ I i i i i i i i i i i i 1985 1986 1987 1988 M an u fa c tu rin g activity in th e M idwest, m e a su re d by th e MMI, im p ro v ed slightly in S e p te m b e r, w ith th e gain in line w ith th e im p ro v e m e n t in th e U.S. m a n u fac tu rin g in d ex . F o u r m a jo r secto rs c o n trib u te d to th e M idw est’s ad v an ce, w ith th e only e x c e p tio n b e in g m etalw o rk in g w hich re g iste re d its se c o n d d e c lin e in th re e m o n th s. W hile gains in m a n u fa c tu rin g activity n atio n w id e, m e a su re d by th e USMI, w ere c o m p a ra b le to th e M idwest, th e m a jo r sectors in th e n a tio n a l in d e x su g g ested u n d e rly in g softness in th e n a tio n ’s p e rfo rm a n c e . T h re e secto rs— m ach in ery ’, m e ta l w orking, a n d tra n s p o rta tio n — w ere d e c lin in g a n d th e c o n su m e r-re la te d se c to r was flat, leaving gains co m in g only fro m th e c h em ical sector. Chicago Fed Letter F E D E R A L R E S E R V E BA N K O F C H IC A G O P u b lic I n fo rm a tio n C en ter P .O . Box 834 C h ica g o , Illin o is 60690 (312)322-5111 11 I I 1 I I LI l u 1989 N O TE: T h e MMI a n d th e USMI are co m p o site indexes o f 17 m a n u fa c tu rin g in d u stries a n d are deriv ed fro m eco n o m e tric m odels th at estim ate o u tp u t from m o n th ly h o u rs w orked an d kilow att h o u rs data. For a discussion o f th e m ethodology, see “R eco n sid erin g th e R egional M a n u fac tu rin g In d e x e s,” Economic Perspectives, F ederal Reserve Bank o f C hicago, Vol. XIII, No. 4, Ju ly /A u g u s t 1989.