Huge increase in the employment-to-population ratio!

Photographer: Win McNamee/Getty Images

More Americans Should Be Working

Justin Fox is a Bloomberg View columnist. He was the editorial director of Harvard Business Review and wrote for Time, Fortune and American Banker. He is the author of “The Myth of the Rational Market.”
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Here's a fun chart, from the detailed estimate of the impact of Bernie Sanders' economic plans prepared by University of Massachusetts at Amherst economist Gerald Friedman:

Source: Gerald Friedman

The chart shows the employment-to-population ratio of U.S. civilians 16 and older. For decades it rose, driven in large part by women entering the workforce. It peaked in April 2000, at 64.7 percent, and it's way down since. The Congressional Budget Office thinks the ratio will keep declining, mainly because more and more aging baby boomers will drop out of the workforce. Friedman, who is dubious that demographics are the main reason for the decline, thinks the tax and spending changes that Sanders hopes to introduce could cause a big bounceback.

Friedman's projections, which include a claim that real gross domestic product growth would rise to 5.3 percent a year (from 2.4 percent in 2015) under the Sanders plan, have come under fire. Four former chairmen of the White House Council of Economic Advisers during Democratic administrations wrote Wednesday that "no credible economic research supports economic impacts of these magnitudes." This was the kind of dodgy stuff that Republicans do to justify budget-busting tax-cut plans, they complained, and prominent Democratic economists Brad DeLong and Paul Krugman agreed.

I'm not going to attempt to referee this debate, other than to say that of course Friedman's estimates are oversimplified and extremely optimistic best-case scenarios -- that's sort of the whole point of such an exercise. But are they crazy? The chart on the employment-to-population ratio in particular got me thinking. A leap of the sort that Friedman envisions seems unlikely. I took a look at the ratios in a few other countries, though, and it turns out it's not unprecedented.

Here's what the past quarter century has looked like for men in the U.S. and four other wealthy countries with aging populations:

And here it is for women:

I've separated men from women because the trajectories are so different. Also, note that these percentages (from the Paris-based rich-countries club, the Organization for Economic Cooperation and Development) just cover the working-age population, not all adults as in Friedman's chart.

Among both men and women, the U.S. started out at or near the top in 1990 and stayed there during that decade, but is now at the bottom. Meanwhile, the most dramatic gains came in Germany, which enacted painful labor market reforms starting in 2003 that cut back on long-term unemployment payments but offered more help and new incentives for finding jobs. Meanwhile, every country except the U.S. has seen significant gains in the proportion of women working. That's partly because they all -- especially Germany and Japan -- started out in 1990 with lower percentages than the U.S. did. Still, the difference in direction between the U.S. and other countries since 2000 is striking.

Despite job gains over the past few years, then, the labor market in the U.S. seems to be malfunctioning in a way that labor markets in other rich countries aren't.

Why is that? Maybe the U.S. system of unemployment insurance and job retraining and placement is busted. Maybe the perverse incentives built into the Social Security Disability Insurance program are keeping people who could work out of the labor force. Maybe the U.S. educational system is doing an especially poor job of preparing people for work. Maybe increasing geographic divergence in employment in the U.S. is leaving job seekers stranded far from jobs. Maybe poor child-care options are keeping American women at home. Maybe U.S. corporations, under pressure from capital markets, are spending so much money on share buybacks that they’re underinvesting in labor. Maybe the U.S. is on the cutting edge of technological job displacement, with the robots taking over here first.

There are lots of other possible explanations. I don't know exactly what combination of causes is to blame -- and I doubt Bernie Sanders does either. But as a campaign issue and a focus for government policy, this seems about as important as they come.

  1. Matthew C. Klein has made a similar observation relative to GDP growth at FT Alphaville.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Justin Fox at justinfox@bloomberg.net

To contact the editor responsible for this story:
Zara Kessler at zkessler@bloomberg.net