Mary C. Daly, Associate Director of Research and Group Vice President, discusses U.S. labor markets (video, 4:15).
This video is also available on our YouTube channel.
Economics in Person features a discussion on aging baby boomers and declining labor force participation.
Mary C. Daly is Associate Director of Research and Group Vice President at the Federal Reserve Bank of San Francisco. Her areas of research focus include labor economics, public economics, and social welfare. See her research page.
Daly, Mary C., Bart Hobijn and Joyce Kwok. “Labor Force Participation and the Future Path of Unemployment.” FRBSF Economic Letter (September 13, 2010).
Daly, Mary C. and Tali Regev. “Labor Force Participation and the Prospects for U.S. Growth.” FRBSF Economic Letter (November 2, 2007).
Zheng, Liu and Mark Spiegel. “Boomer Retirement: Headwinds for U.S. Equity Markets?” FRBSF Economic Letter (August 22, 2011).
00:00:06 In the previous two segments we talked about the toll that the great recession took on US labor markets and the progress we made thus far in digging out of that whole. In this remaining segment I want to talk about a challenge that was facing policy makers before they ever had the great recession and then how the great recession is added to that challenge. The challenge before us is who’s going to work in the labor market. Who is going to be left in the labor force?
00:00:30 And why do we have that challenge? It’s because the baby boom is aging. The baby boom was a very large birth cohort. They’re going to retire. And we’re gonna have fewer and fewer workers there to support their retirement. To put this in context think about the labor force participation rate in the United States. So the labor force participation rate is the percentage of the population that’s either working or actively looking for work. And as you can see this has been declining for a decade and started to decline dramatically in the latest recession.
00:01:00 But if you take the congressional budget office forecast, they’re the best forecasters of these long term trends in the United States. You see that they expect a continual decline. Those declines are partly related to the aging of the baby boom, but also exacerbated by the great recession that they’ve now incorporated because of so much long term damage to the labor market -- so many people who are long term unemployed who may never be able to come back. So why is this a challenge? Why does a declining labor force participation rate pose a challenge for policy makers?
00:01:30 The key reason is because it increases our dependency ratio. The dependency ratio is the number of people that the workers who pay into the tax base have to support. So if you think about before the baby boom retired we had a lot of workers -- the baby boom -- and all the other workers along with them who are paying into the tax base and supporting retired workers and children who don’t participate in the labor market. When the baby boom ages into retirement, actually the workers who remain behind are gonna be supporting a larger and larger number or retirees.
00:02:02 If you think about this dependency ratio in the context of the United States you can see that we were in a period where for every 100 workers there were about 20 retired people or 65 and older individuals. But we’re looking at a future where we had for every 100 workers about 40 people over the age of 65 who are there to support. What this means for the workers in prime age is that increasingly their tax revenues will go to people 65 and above and won’t be able to used for their current consumption for the consumption of houses and other things that we’ve been accustomed to having.
00:02:35 It also limits their ability to invest in children or society’s ability to invest in our future because we’re actually taking care of individuals who are not in the labor force. Finally the labor force participation rate or how many people are there available for work challenges our potential output or determines our potential output. To put it in the context of actual numbers it’s useful to remember that in the 1990s we were looking at growth rates for potential around three percent.
00:03:02 So when we would all get up and look at the GDP release, we would look at our newspaper and we’d say 3.5 percent or .5 above potential. Now, what we’re looking at is potential output growth of more like two, two and half -- maybe two and a half-- something like 2.2. So what that means is again lower standards of living going forward unless we have more labor inputs or faster productivity growth to make up this difference. So the challenge for policy makers is going to be two-fold.
00:03:30 How do we solve the problem we already knew we had prior to the recession of an aging workforce that is going to retire? How do we keep them in the labor market? How do we fund what is a growing and increasing life expectancy among those individuals with fewer and fewer workers? We’re gonna add to that challenge of we have all these workers who have been displaced and now need to be reintegrated back into the labor market. Their reintegration in addition to encouraging the baby boomers to continue some of their work efforts is going to be the main determinant of our standard of living going forward.
The U.S. Labor Market and the Great Recession
1. (0:32) What are the four main categories of workers in the labor force?
2. (1:08) What is the longer term trend in labor force participation rates? How did the recent recession magnify this trend?
3. (1:36) How is the dependency ratio defined? Name the two groups that are considered non-working.
4. (2:18) Mary mentions that in the future we will be looking at approximately how many retired people per 100 workers? How does this compare to our current dependency ratio?
5. (3:00) In the 1990s what was the potential output for the U.S. economy? What is it currently?
6. (3:20) Mary mentions two options for increasing potential output. What are they?
7. (3:27) What are two issues that will challenge policy makers?
8. In what way does a declining labor force participation rate impact the dependency ratio?