The Amazing U.S. Labor Pool

Is its growth holding wages down?

It's a riddle wrapped in a mystery. With U.S. unemployment at a 24-year low, you might think wages would be taking off. Yet labor costs have remained unusually subdued--leading experts to speculate that some new development is inhibiting wage demands. While the explanation du jour seems to be widespread job insecurity, one trend clearly deserves more attention: an unexpected leap in the labor force.

After posting gains of just 1.3 million a year from 1993 to 1995, the labor force--people working or seeking work--has grown by 3.7 million in the past 16 months. That's more than twice as fast as the working-age population.

As economists at Citibank point out, such a surge is unusual so late in the business cycle. Normally, the labor force explodes immediately after a recession, as suddenly improved job prospects induce discouraged workers to look for work again. This time around, it has occurred late in the expansion, after several years of robust growth.

What's more, the pickup isn't confined to areas with tight labor markets. Mark Zandi of Regional Financial Associates notes that New York City's labor force jumped by 3.4% last year--even though unemployment remains above 8%, and the working-age population has been stagnant for years.

In addition, labor-force participation has been rising among nearly all demographic groups. At the end of the 1980s, for example, economists concluded that the portion of women streaming into the work force had leveled off after rising sharply for several decades. Now, women's participation rates have hit new highs. And the rates for both prime-age and older men also seem to be turning up after trending down for decades.

While welfare reform has forced some people to seek work, a study by economist Jill Jacobs of Goldman, Sachs & Co. suggests that it has thus far been a minor factor in the turnaround. Rather, it appears that better job prospects and widespread wage gains are luring many discouraged workers back into the job market. For the first time in the 1990s, reports the Economic Policy Institute, real hourly pay appears to be rising across the wage spectrum.

The surprise is that these pay hikes, which are still quite modest, have sparked such a strong increase in labor supply--an increase that, in turn, has tempered their size. That strong response suggests to economists at both Citibank and Merrill Lynch & Co. that the potential supply of workers is greater than many experts believe.

Thus, the economy may still have some breathing room before wage pressures heat up. Eventually, of course, the slow growth of the working-age population will limit the rise in the labor force. "If we're lucky," says Zandi, "the economy will have slowed to a more sustainable pace before we reach that point."

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