Where Has All The Labor Gone?

The U.S. economy has grown 4.3% in the past year, generating more than 3 million jobs and pulling unemployment down to late-'80s levels. Yet labor-force growth lately has been unusually restrained: averaging a bit more than 1% a year, compared with 1.7% in the 1980s.

The sharp slowdown in labor-force growth stems from a puzzling tailing-off in the share of the working-age population active in the job market. Labor-force participation by women, who have been going to work in ever increasing numbers for decades, seems to have leveled off and in some cases actually fallen. And participation by men, which usually perks up after a recession, has continued its long-term decline (chart).

To some economists, all this suggests that there's a backlog of workers waiting in the wings who will help keep wages from heating up. In this view, unusually slow employment growth in the early stages of this recovery has simply deferred the normal cyclical rise in labor-force growth. As labor demand continues to pick up, more men and women will start hunting for work, slowing the fall in the jobless rate and forestalling a build-up of labor-cost pressures.

But others are not so sure. Economist Alan Reynolds of the Hudson Institute, for example, notes that, as a result of expanded tax credits (cash payments) to poor working households and higher taxes levied on the rich, both groups face marginal tax rates over 40%. Such high rates, he believes, have dampened work effort and labor-force participation by rich and poor alike.

Kevin M. Murphy of the University of Chicago thinks the economy's shifting skill requirements are the biggest argument against a large supply of potential workers ready to move into tightening labor markets. In a recent study, he and fellow economists Chinhui Juhn and Robert H. Topel found that labor-force participation by prime-age men fell by 1.6 percentage points from the early 1970s to the late 1980s. "Virtually all of the decline," he reports, "was among low-wage workers, especially the lowest 10%, whose participation rate fell 6.5 percentage points."

Murphy doesn't see any sign that this trend is slowing down. Pointing to a recent Labor Dept. report that more than half the jobs created in recent years have been in relatively high-wage occupations, he thinks that rising skill requirements in many sectors of the economy will continue to leave many unskilled workers out in the cold.

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