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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.


Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102