The Challenging Labor Market: Current Conditions and Looking Ahead

By at 19 May, 2023, 6:10 pm

by Raymond J. Keating –

On May 9, I had the opportunity to participate in a panel presentation and discussion on Capitol Hill for the Critical Labor Coalition (CLC). SBE Council is a member of CLC, which is working to bring awareness to our elected officials, the media and the public at large regarding the serious, ongoing challenges that rest at the heart of a tight labor market, and to advance policy measures that would help to address these issues. (View a copy of the Capitol Hill presentation here.)

Indeed, businesses of all types and sizes are having significant difficulties in finding and retaining the talent they need. These realities were reflected in results in SBE Council’s Small Business Checkup Survey conducted by Technometrica. Consider the following findings regarding small business-owner responses to key questions about the labor market:

Unfortunately, these and related labor market challenges aren’t only about current or recent circumstances, for example, tied to the pandemic/post-pandemic situation, but also are tied to longer run issues.

For example, the labor force participation rate has been on the decline since the late 1990s, but particularly since the Great Recession (which ran from late 2007 to mid-2009). As noted in the following chart, the U.S. labor force participation rate hit a high (average annual rates) of 67.1 percent in each year from 1997 to 2000. That fell to 62.7 percent in 2015, climbed back to 63.1 percent in 2019, and registered a recent low of 61.7 percent in 2020 and 2021. In 2022, the labor force participation rate inched back up to 62.2 percent.


Source: Federal Reserve Bank of St. Louis. FRED

Part of this trend is attributable to an aging population, so let’s focus on the prime working age range of 25 to 54 year olds. Their labor force participation rate (as noted in the following chart) peaked in the late 1990s at 84.1 percent, came in at 83.1 percent in 2008, and declined to 80.9 percent in both 2014 and 2015. It then climbed back to 82.5 percent in 2019, dropped during the pandemic years of 2020 and 2021, and then returned to 82.5 percent in 2022.


Source: Federal Reserve Bank of St. Louis. FRED

By the way, while the female labor force participation rate among 25 to 54 year olds has remained relatively steady since the late 1990s – for example, coming in at 76.8 percent in 1999 and 76.4 percent in 2022 – the male participation rate has been on a long decline.


Source: Federal Reserve Bank of St. Louis. FRED

As noted in the above chart, the labor force participation rate for males 25-to-54 has been declining since at least the early 1960s. But let’s just focus on the data since the early 1970s. In 1970, the labor force participation rate for this group registered 95.9 percent. As of 2022, that had fallen to 88.6 percent.

Population Growth Challenges

Again, these trends present challenges, but there’s more. These participation rates must be placed within the context of what’s been going on in terms of the population.

The main U.S. working age population – again, people from ages 25 to 54 – really hasn’t budged since late 2007. In December 2007, there were 126 million people in this group, and that number only grew to 127.2 million in December 2022.

If we expand this to 15 to 64 year olds, that population group increased from 196.5 million in December 2007 to 207.5 million in December 2022 – an increase of only 5.6 percent over that same period.

And what might lie ahead? The Congressional Budget Office published a report titled “The Demographic Outlook: 2023 to 2053” in January 2023. Consider this key projection/comparison:

“The civilian noninstitutionalized population grows from 266 million people in 2023 to 301 million people in 2053, in CBO’s projections, expanding by 0.4 percent per year, on average. That measure, which CBO uses to project the size of the labor force, is composed of people age 16 or older. The subgroup of people ages 25 to 54 (adults in their prime working years) grows at an average annual rate of 0.2 percent over that period—more slowly than in recent decades. (Over the past 40 years, the civilian noninstitutionalized population as a whole grew at a rate of 1.1 percent, and the prime working-age population grew at a rate of 0.9 percent.)”

So, the CBO is projecting that the labor force will grow over the coming 30 years at a fraction of the pace that prevailed over the past four decades, and the growth among those 25 to 54 years old will be even slower, and an even smaller fraction of past experience.

If the CBO is even in the ballpark, this would point to some grim economic results for the U.S.

Make no mistake, a growing population, particularly under a free enterprise system, means a larger pool of people to generate new ideas, more entrepreneurs to drive innovation and growth, more workers contributing to the economy, and more consumers being served by entrepreneurs, businesses and workers. When population growth slows dramatically, stagnates, or perhaps even goes negative, the result is less economic growth and stagnating living standards.

In the end, slower population growth, including an aging population, hurts economic growth, standards of living and quality of life by limiting the growth of entrepreneurs and of workers.

Solutions: Immigration Policy Plays an Important Role

Policy reforms are needed, including on the immigration front. The often ugly politics of immigration must be set aside, and replaced by clear economic facts and thinking. Make no mistake, immigration is an economic plus for a variety of reasons. Keep these four straightforward points in mind:

First, immigration allows market demands for both low-skilled and high-skilled labor to be met. That demand comes from businesses that ultimately serve consumers.

Second, other workers, including the native born, benefit as immigrants do complementary work, thereby enhancing the productivity of all workers. If that’s doubted, simply look at the survey results noted earlier with a labor shortage hampering the operations of businesses, and therefore, the well-being of fellow workers.

By the way, immigrants in the U.S. have higher labor force participation and employment rates than the general population.

Third, given that immigrants are willing to deal with risk and uncertainty (leaving for another country is an undertaking drenched in risk and uncertainty), it’s not surprising that immigrants have higher rates of entrepreneurship than do the native born.

Fourth, it again follows that more immigrants in the workforce mean more consumers.

The U.S. needs to return to being a nation that welcomes immigrants, and by doing so, entrepreneurship, economic and income growth will not simply recover but flourish.

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council. His latest book is The Weekly Economist: 52 Quick Reads to Help You Think Like an Economist.


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