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Why is the U.S. labor force declining and struggling?

Puzzles attract economists.  Let’s take a look at two of them involving labor — we just celebrated Labor Day, after all — and some of the explanations proposed by economists.

The labor force participation rate measures the fraction of the working-age population that either has a job or is searching for one.  Here is what it looks like since 1960:

CIVPART chartSource: Federal Reserve Bank of St. Louis FRED Database

The rate rose from the early 1960s to a peak around 2000, driven primarily by the baby boom and by increasing labor force participation rates of married women with children. The rate started to drift down after 2000, then fell off a cliff during the Great Recession. The August jobs report just came out and the labor force participation rate fell yet again. It’s now at 63.2 percent, the lowest since July 1978.

The puzzle is not why the rate started to fall after 2000. This was to be expected given an aging population and no further growth in female labor-force participation. 

The puzzle is why the rate fell so sharply starting in 2008 and stayed down since then. Put another way, why did 4 percent of the working age population leave the labor force over the past five years? There is no other period when the labor force participation fell by so much so rapidly.

Our second puzzle is the share of national income paid out in the form of wages and benefits, what economists call labor’s share. Here’s the picture:

Labor's share of national incomeSource: Federal Reserve Bank of St. Louis FRED Database

From a peak of just over 57 percent in 1970, the share drifted down to 55 percent in the mid-1990s, with a brief revival before falling again after 2000.

What’s even more puzzling is that this phenomenon is not confined to the US.  In a recent paper, Loukas Karabarbounis and Brent Neiman of the University of Chicago demonstrate that “the global labor share has declined significantly since the early 1980s, with the decline occurring within the large majority of countries and industries.” 

Solutions to the puzzles? 

So what’s going on? As you can imagine, there’s no single answer, but economists have proposed a variety of hypotheses about these puzzles. 

One possibility is that these are not actually puzzles but are the result of a particularly deep and harsh recession. When the economy picks up steam both the labor-force participation rate and labor’s share will rise.

Another prospective cause is that this is not a short-run, cyclical problem but a long-term, structural problem. Tyler Cowen, an economist at George Mason University, is the leading proponent of this view. The title of his recent book says it all: “The Great Stagnation: How America Ate All The Low-Hanging Fruit of Modern History, Got Sick, and Will (Eventually) Feel Better.”  Technological progress slowed considerably starting in the mid-2000s, reducing the growth in the demand for labor and keeping real labor earnings in check. He argues that labor-force participation and labor’s share will bounce back a bit once the recession’s effects end but the trend fall in both measures will continue. 

Finally, Erik Brynjolfsson and Andrew McAfee of MIT argue that Cowen has it backwards.  It’s not that technological progress has slowed; instead, we are involved in a “race against the machine” in which the machines are winning.  They write, “computers are now doing many things that used to be the domain of people only.” Further, “while digital progress grows the overall economic pie, it can do so while leaving some people, or even a lot of them, worse off.” 

My hunch is that Brynjolfsson and McAfee are on to something very important. 

In the 1920s, small electric motors replaced steam engines throughout U.S industry, while at the same time internal combustion engines in cars and trucks increasingly took the place of steam railroads in moving America’s people and goods. Both of these developments led to huge increase in output and productivity and but also caused massive disruptions in labor markets. 

I have a hunch that we’re going through something similar today. It’s still a hunch, but that’s sometimes the first step in solving a puzzle.

Comments (19)

  1. Submitted by jody rooney on 09/09/2013 - 10:52 am.

    Good insightful I too think Brynjolfsson and McAfee are on to

    something. In the growing service where both Mr. Johnson and I have worked rather than production or say the manufacturing sector the increase in capital per worker started in the 1980’s and hit in a big way in the 90’s. .

    I worked for the Corps of Engineers who was an early adopter because where the labor force was more than 80% engineering, technical specialists with Masters degrees requiring stats and other numbers crunchers. The PC was a welcome tool to crunch those numbers. As they took over first the typing pool, then the editors and clerk positions started declining.

    As the computer phobic senior executives of the first generation started to retire the new executives stream lined documentation and communication even more. And with the lack of editors and secretaries and greater education of the work force engineers and other number crunchers had to become better at writing, and they did.

    Now if you could just put all those St. Cloud students to work looking at the change in the labor to capital ration in the various industry sectors it would be interesting to see if the increasing sectors faster increasing capital per employee than other sectors.

    The blip 97 to 04? Construction?

  2. Submitted by Gerald Abrahamson on 09/09/2013 - 11:23 am.

    Moving towards a “Star Trek” society?

    Fewer and fewer people needed to produce basic goods (food, clothing, shelter) for everyone means a relatively largely unemployed society. These people are able to do what they want–which is what interests them–because they do NOT have to “work for a living”. Productivity pays off in the long run.

    • Submitted by Paul Brandon on 09/09/2013 - 01:17 pm.

      There’s a small

      leap of faith here.
      You may be looking to the future, but it can also be instructive to look at the past.
      In this case, the Roman ‘Bread and Circuses’ which was a response to a similar situation, and which some have linked to the Roman’s decline.

    • Submitted by Frank Phelan on 09/09/2013 - 09:20 pm.

      Unemployment Never Sounded So Good

      So all those people freed from a 40 hour week (and the ensuing paycheck) are living the dream now? No pension, no health care, no paid holidays to keep them from what they want to do.

      Gosh, makes me feel like I’m not so lucky I still have a job.

    • Submitted by E Gamauf on 09/02/2014 - 12:56 pm.

      Villas on the Riviera, of course!

      “…largely unemployed society.

      These people are able to do what they want–which is what interests them–because they do NOT have to “work for a living.” ”

      People not working – all live well?
      Did they all inherit their vast fortunes, or have they been frugal with the cat food, however long they did work? I hope you were tongue-in-cheek when you wrote that!

  3. Submitted by Dennis Tester on 09/09/2013 - 01:15 pm.

    So given all this information

    why would anyone be in favor of liberalizing the immigration policy in this country?

    Opening the borders and allowing 12-20 million additional people to join the labor force will be counterproductive.

    If anything we should be declaring a moratorium on any new immigration for at least five years.

    • Submitted by Paul Brandon on 09/09/2013 - 06:51 pm.

      The numbers show

      that immigrants get jobs, purchase goods and services, and pay taxes.
      The labor force is declining in large part because of a weak economy; immigrants strengthen the economy.
      And of course, ALL of us (even Native Americans) are immigrants or the descendents of immigrants.

  4. Submitted by Ray Schoch on 09/09/2013 - 02:59 pm.

    Yes and no

    I find myself agreeing with Mr. Johnston’s hunch — it does seem to be a structural problem in industrial capitalism, and thus industrial societies. American railroads — still the most environmentally-friendly and economically efficient means of moving large quantities of goods and people — are a pretty good test case of what Johnston lays out in the article.

    To the casual observer, it would appear that technological change has passed the railroads by. After all, it’s still huge locomotives pulling long strings of metal — truly heavy metal — cars along steel rails that haven’t changed their shape in a century and a half. Appearances can be deceiving. Railroads have been among the leaders in adopting technology, and adapting it to suit their particular purposes. That applies to computers, especially.

    Sorting and routing of cars and their loads, coordinating train movements, synchronizing the actual running speed of multiple locomotives pulling (and/or pushing) an especially long train — all of these and more are tasks that lend themselves readily to computerization, and railroads have enthusiastically adopted that technology. Among the results is that there’s no longer a need for brakemen, firemen, and a host of other railroad workers who, a century ago, would have thought themselves in possession of a good job with a lifetime tenure. Those employees that remain have to take on multiple tasks, and also have to retrain with some regularity.

    Assuming the entire economy doesn’t collapse back to the 21st century equivalent of 1850s agrarianism, it’ll be interesting to see what happens when computerization begins to *really* make itself felt in the surface transportation world. “Smart” highways, “smart” cars, and perhaps of even more impact, “smart” trucks, that travel predetermined routes, and do so automatically, may well transform how people and goods travel by road. The end of the over-the-road trucker (maybe not the industry, but certainly the driver) might be on the horizon as I write this, and the effect of computerization in automobile traffic is already being felt in everything from coordinating traffic signals to bluetooth connectivity to the annoying voice telling you to “Turn left at the next corner.”

    If this comes to pass — and dozens of other, similarly large changes in the way people live and work — massive numbers of people will find themselves unemployed. In that context, I’d like to believe that Gerald Abrahamson is correct, and that all those unemployed people will be happily self-realized, and able to do what they want, and what interests them, because they don’t have to work for a living. Unfortunately, I’ve yet to see anything persuasive that suggests a way for these self-realized unemployed folks to put food on their tables and pay to keep the lights and heat on in long Minnesota winters.

    I’d very much like to see another article that addresses the question raised by Jody Rooney. What’s happening to the share of national income that goes to this declining labor force? Is that trend, whatever it is, relatively consistent across the entire economy, or are some segments affected significantly more or significantly less? Why?

    If it hasn’t already been done, someone has a dissertation waiting for them…

    • Submitted by Paul Brandon on 09/10/2013 - 09:32 am.

      We know that

      the share of GDP that’s going to wages is decreasing, and the share going to corporate profits is increasing (and often ending up offshore).
      The real question is how to reverse this trend.
      It may just be a coincidence that actual corporate taxes relative to corporate income (not marginal tax rates) are at a record low.

    • Submitted by jody rooney on 09/10/2013 - 12:32 pm.

      Don’t encourage me to go back to school Ray

      by suggesting good research problems.

  5. Submitted by jason myron on 09/09/2013 - 03:02 pm.

    Moratorium on immigration?

    I guess that “Give me your tired, your poor,
    Your huddled masses yearning to breathe free,
    The wretched refuse of your teeming shore.
    Send these, the homeless, tempest-tost to me,
    I lift my lamp beside the golden door!” thing is kinda lost on what passes for “patriots” these days.

    • Submitted by Neal Krasnoff on 09/09/2013 - 05:28 pm.

      You won’t show very much contempt for us

      when *you’re* faced with an H1B, an illegal, or an overseas worker displacing your job.

  6. Submitted by Rich Crose on 09/09/2013 - 03:06 pm.

    Worker Disenfranchisement

    When the great recession impaled the American Dream many just gave up. Underwater on their beautiful house, constant money-bickering with their beautiful wife. When they asked themselves, “How did I get here?” The answer was that they bought into the American Dream advertised in glossy magazines and slick commercials. Working two low-paying jobs just to keep their heads above water, cut loose when their employer had to make a choice between the Porsche and six employees. How many said, “The heck with it.”

    How many retired? How many young workers saw that the rats were winning and walked away from the rat race? How many started doing odd jobs for cash? How many found that they didn’t need to work 9 to 5 after they lost the five bedroom home, three cars, a boat, a lake home, and a garage full of toys.

    These people stopped being statistics so economists don’t know how to measure them.

  7. Submitted by Thomas Chapman on 09/09/2013 - 03:21 pm.

    Could the French have been right? Disintermediation of the workforce by technological advance? Let’s hear it for the four day workweek!

  8. Submitted by John Reinan on 09/09/2013 - 10:13 pm.

    The 20-hour work week was once a worry

    I remember as a kid,in the ’60s, I’d sometimes see articles speculating that machines would soon take on so many tasks that the average American would only have to work 15 or 20 hours a week. And the great issue, in the minds of those authors, was: What in the world would we do with all that leisure time? The assumption was that we’d have a spectacular standard of living, and the biggest problem we’d face was boredom from too much time on our hands.

  9. Submitted by jason myron on 09/10/2013 - 06:34 am.

    Thanks, Neal…

    but I’m already aware of the difference between a contraction and a possessive adjective. However, you’ll find that the possessive was inscribed on the plaque that was placed inside the Statue of Liberty. And yes… I’ll still feel loads of contempt for anyone who vilifies immigrants.

  10. Submitted by Christopher Clark on 09/14/2013 - 03:26 pm.

    Where are the jobs?

    American companies hire people overseas to come here. They get work visas for period of time. They don’t have income tax or any type of taxes deducted at all. They take home their gross amount while rest of us take home what is leftover from income, social security etc…not a fair system. Why are we subsidizing these non-citizens?
    Big companies like Target and Ameri Prise don’t pay benefits for these non- citizens. Solution: train our own citizens for high paying jobs. Make us proud of the American Based companies and wages. If we’re concerned about future, train our own. I’d love to get training in info tech and science background.
    I have a degree yet no specialty job in particular market after all these years. We’re getting screwed for enormous profits being made off the low end workers.

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