I have a confession: I am a serial worrier. I am always anxious about the future and how it will play out for me and now, my family. A lot of my time is spent taking in the information that is out there and using my knowledge and training to try to pick up broad trends on both a local and global scale and how I can position myself to either protect myself or reap the rewards of the broad conclusions about the future that I come to.
I don’t use this inference of the future just for investing, I use it to build my personal skills to prepare for changes in the labor market, social and political life here in the US. A lot of this leads into why I chose the field of work I did and why I learned to speak Spanish. Back in the late 90’s when I was in high school, I really enjoyed history and social studies. I thought that one day I would be some type of researcher, professor or civil servant…until I found out how much money one makes in these fields, then my ideas of what to study quickly changed.
I found that science and economics were also to my liking (and coincidentally they paid better) so I ended up studying chemistry and economics. Chemistry later turned into a math degree since chemistry and economics did not overlap much and I had taken enough math classes to be 3 classes short of a degree in math. I also took the time during my undergraduate studies to take college level Spanish for 3 years and take a year to study abroad in Spain.
It sounds silly now, but my obsession with learning Spanish that ended up making me stay in school for a 5th year just so that I could study abroad was rooted in fear of demographics. This fear was rooted in the idea that was circulated in the mid to late 90’s that the US was essentially becoming a Spanish speaking country. In fact some sources said that the US was poised to have some of the most Spanish speakers of any country in the world (in fact now we are number 2). I naively thought, “boy I better learn this language before it’s required to get a job”.
Silly me, I grossly underestimated the cultural backlash in the US to a foreign language invading people’s daily lives and the dominance of English on a global scale as a lingua franca. Nevertheless, I pressed ahead and became fluent. This did end up getting me a job later but one that ended up specializing in Latin America.
What This has to do with Growth & Employment
Being unemployed at the moment has given me a lot of time to think. Especially about my place going forward and how the employment market and the growth of the economy may evolve over the coming decades. Just as I had studied economics and learned Spanish to position myself for change in the past, I want to look at what may be to come in the next decades in terms of growth and the labor market.
My worry in this area comes from demographics again and its effect on the economy. Let me explain: the textbook definition of GDP is the value of all goods and services produced in an economy. If you are working in some way, you are a part of the production of value through the good or service you produce. The most basic components of what produces goods and services are people (labor) and their productivity. Productivity can be enhanced by machines (the internet as opposed to printing flyers, a tractor as opposed to hoeing by hand) but essentially labor and its productivity are probably the two most important factors that determine the output of all goods and services in an economy.
Children and retired folks are not producers in an economy (for the most part). The retired are living off of their savings and not producing much and the children are still in training for their spot in the labor market. Both are essentially beneficiaries of those that are working.
Given these facts, the size of the population that is working can be very important to the economy. If we have a given level of GDP now, and the labor pool suddenly falls, unless those that are left make up for the loss of labor by increasing their productivity, the economy will contract (recession). So that got me curious to see where the labor pool of the United States is projected to head in the next decades and if we are in for a Japan like situation with a falling population and anemic economic growth.
What the “Experts” Say
The Bureau of Labor Statistics (BLS) is the government body that concerns themselves with these types of questions and luckily they make a lot of their data and projections free for the public. In September of last year they released “A Look At The Future Of The U.S. Labor Force To 2060” which used a lot of assumptions (like all projections) but provides some interesting charts that I would like to highlight here.
The first is that the overall population is still projected to grow although at a slowing rate. I estimate this should put the total US population at 2060 somewhere around 420 million people.
The next chart shows that immigration will play an important part in the population growth going forward. This is a reasonable assumption based on our history but a big assumption nonetheless considering the current political climate. It assumes no matter what happens politically in the next 43 years, the US will continue to welcome immigrants. If you believe that then the BLS thinks we will continue to grow the population with immigrants eventually accounting for about 80% of the growth in population.
The civilian non institutional population refers to those ages 16 and older who are not incarcerated, in mental institutions or serving in the military. This population makes up the pool for the labor force. The actual labor force is dependent on the participation rate of this pool. The good news is that the labor force is expected to increase from 157 million in 2015 to 186 million in 2060, an increase of 29 million. This means the labor force is essentially projected to grow at a little less than 1% over this period.
The bad news is that the growth in the labor force is not projected to be steady, it is projected to grow at a decreasing rate over the next coming decades.
The other bad news is that the labor participation rate is expected to fall for both men and women over this period. The BLS did not give much of an explanation for why they assumed this, but I suspect it has something to do with more automation and technology eliminating jobs that are out there today. In that case, some people get discouraged and just stop participating in the labor force.
How I Think This Will Play Out
If we assume that the average American worker maintains at least the same productivity she has now, then based just on the growing labor force, we should expect to see economic growth continue at least at a slow pace, potentially in the range of around 0.5% to 1.0% on average over the long term. Of course productivity will be the defining characteristic going forward. If workers can continue to increase productivity, then that can add even more to annual economic growth in the future.
However the BLS also has some charts that deal with that issue as well. In the chart below, growth in labor productivity, output and hours worked are shown over all the economic cycles since 1948 and the most recent cycle has seen the slowest productivity growth of all cycles in the past 67 years at a little above 1%.
If we assume this continues going forward, we can expect economic growth to increase by essentially what we have been seeing since the past recession: 1-2% annually. This isn’t the gangbusters growth of the 90’s but hey, at least we aren’t looking at a Japan like implosion.
Speaking of a Japan like implosion, the chart below shows the Japanese labor force from 1953 to 2013. You’ll notice that it seems to show the labor force leveling off for Japan sometime in the late 90’s.
But this hides increasing participation rates of women (which was much lower than other rich countries) and of the elderly. If we look at what is considered the working age population, it quickly becomes clear why Japan has been struggling to grow and why the labor force is leveling off even with these higher participation rates.
Basically the higher participation rates of women and the elderly are only short term fixes to keep growth going. Unless Japan allows more immigration, decides to have more kids or has a spectacular and sustained productivity increase, the country will continue to tread water economically.
Conclusion
Even with lower productivity growth and falling participation rates, for the time being it seems that the US will still be able to continue its labor growth enough to continue to grow the economy at a steady but slow pace. This says nothing of the inequality we may continue to see due to the highly skilled jobs needed for the future or for the hopes of some politicians to try to bump of the growth levels up in the short term, they may only be fighting a losing battle against the broader demographic trends
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