Workers May Get Scarce, But Nobody's Scared

By the time Sarah Pace's second child was born in May, the 32-year-old corporate lawyer had used up her three-month maternity leave because of pregnancy complications. Her Chicago law firm offered to give her an extension if she would agree to a specific return date. But Pace wasn't ready. So, with her lawyer husband earning enough to support the family, she quit. "I'm planning to come back at some point," she says. "It's just a question of when."

For nearly 30 years, more mothers like Pace have flocked to work, steadily increasing the share of the U.S. population that holds or wants a job. But in the past five years, the participation of women in the labor force has leveled off (chart). The reasons include a rising birth rate, which keeps more women at home, and a slowdown in the speed with which new mothers return to work. Beyond that, young women are remaining in school longer. At the same time, the male participation rate, which has been drifting lower for decades, has suddenly started to race downhill, for reasons that aren't entirely clear.

SHORTAGES LOOM. These trends have tremendous implications for the economy. In a typical recovery, unemployment remains high at first as previously discouraged workers suddenly flood the job market. Today, the absence of these returning workers largely explains why the jobless rate has plunged to 6%, even though job growth, while improving, is 25% slower than in prior recoveries. What's more, some economists believe that the share of adults who want to work may have slowed permanently or even stopped growing. Result: the labor and skill shortages that popped up during the late 1980s could return with a vengeance if the economy continues to grow.

Such shortages, oddly, might have a positive economic impact. True, companies would have to scramble to find qualified workers. But this likely wouldn't trigger inflationary wage hikes, many economists believe. After all, global competition remains stiff, and productivity has been climbing at nearly double the anemic pace of the 1980s. Instead, labor shortfalls would likely spur employers to invest in more technology, not labor. This would keep efficiency growing and allow wages and living standards to rise again without making U.S. companies uncompetitive. "You would like to see wages go up if it doesn't push up prices, which can happen if productivity rises," says Martin N. Baily, an economist at the University of Maryland.

The central question is whether labor force growth really has slowed for the long term. Until recently, most economists assumed that the participation rate would chug along in the 1990s at roughly the same 0.3% annual increase recorded in the 1980s. Few even blinked when it fell in the recession, since many people leave the labor market--quit looking--when jobs dry up. But after three years of growth, the participation rate is no higher than its 1989 peak of 65.5%. This is prompting experts to rethink their assumptions.

The job-market behavior of women has attracted the most attention. After climbing eight percentage points in the 1970s and six points in the 1980s, the female participation rate has edged up less than one point since 1990, to 57.9% of all women last year, according to the Bureau of Labor Statistics (BLS).

Some of the slowdown revolves around school. Because college graduates' pay has outpaced that of other employees, students have more incentive to keep on studying. That's just what women are doing. Only half of female teenagers want to work today, vs. about 53% in 1987, according to the BLS. Meantime, their enrollment rate has jumped four points, to 64%. The same is true of 20- to 24-year-olds. "Young women aren't going home to take care of the kids, they're going to school," says BLS economist Howard Hayghe.

Motherhood is the other main factor. The birth rate has jumped from 1.8 children per woman in the 1980s to nearly 2.1 since 1990. This has brought an extra 300,000 or so births a year. Result: More women are not working for three to six months, the length of maternity leaves. What's more, the Census Bureau has lifted its birth rate projection for the '90s from 1.85 to 2.1, which suggests that more women will remain out of the workforce in the future.

Like Sarah Pace, more mothers also may be less anxious to return to work. Census doesn't ask women how long they take off for childbirth. But it does ask those with kids under a year old whether they're working. And this figure, now 54%, hasn't budged since 1990, after climbing two percentage points a year since 1970. The higher birth rate also reflects the fact that more women are having two children. Only 50% of mothers return to work after their second child, vs. 59% after their first. "Both trends affect the participation rate," says Census analyst Martin O'Connell.

STILL SEARCHING? Why men are dropping out is more of a mystery. The rewards of a better education help explain why the share of 16- to 24-year-old males who want a job slumped by two percentage points since 1987, while their school enrollment jumped nearly three points, to 65%. But it's unclear why the participation rate of 25- to 54-year-old men, which slid by less than a point in the 1980s, has skidded by an additional two points since 1990, to 91.5% in May. Merrill Lynch & Co. economist Bruce Steinberg suggests that many men idled by corporate restructurings have simply given up job hunting, at least temporarily. However, the BLS's monthly count of discouraged workers has remained at about 500,000 since 1992.

Whatever the reason, employers will be scrambling for workers if men and women continue to stay out of the labor force. The flood of women and baby boomers kept labor plentiful for two decades starting in the late 1960s. When interest rates soared in the 1970s, it became cheaper to hire workers than to make capital investments. This was one reason productivity growth slowed. Because interest rates remained high, the equation didn't change much as labor shortages cropped up in the late 1980s.

Today, by contrast, the cost of capital is relatively low, a key reason for rising productivity. If labor now becomes scarce, employers will have an even greater incentive to substitute capital for labor. "Usually, we get fast productivity growth early in a recovery, and then it slows down," says Lehman Brothers Inc. chief economist Allen Sinai. "But labor shortages could keep it from slowing this time."

Worker scarcity isn't a pleasant prospect for employers. Still, if today's productivity revival continues over the long term, it may be the best thing to happen to U.S. living standards since they went into a slump two decades ago.

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