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U.S. Labor Force Trends

Since the 1950s, a critical driver of the United States’ competitive advantage has been its growing and highly educated labor force. Immediately following the end of World War II, millions of servicemen returned home to start anew. The result was a rapid increase in births now referred to as the baby boom. Indeed, between 1946 and 1964, nearly 80 million babies were born. Growing up in an era of uncontested prosperity, the baby boomers became the most educated and affluent generation of its time. Significantly, during this time, the role of women was rapidly changing. Female baby boomers were well educated and highly independent. As a result, they entered the workforce at an unprecedented rate. The female participation rate, a measure of the percentage of working age women in the labor force, increased from 34 percent in 1950 to 60 percent by the year 2000 (Toossi, 2012).

Slowing Labor Force Growth

For decades, U.S. businesses had a growing pipeline of available talent that helped fuel their rapid economic growth. However, since 2000, there have been significant headwinds slowing the labor force growth rate that will have a negative impact on economic growth well into the foreseeable future. There are two forces negatively impacting the U.S. labor force growth rate: slowing population growth and declining labor force participation rates. Population growth is a product of fertility rates, which is the average number of children born to a woman over the course of her life and immigration. In the 1950s, the average number of births per woman was 3.5. Using the most recent U.S. Census Bureau data, the Bureau of Labor Statistics (BLS) projects the future fertility rate will remain close to the present level of 2.1, which is roughly the replacement level of the population (Toossi, 2012).

Thus, if it weren’t for net immigration growth, the U.S. population, like most of the developed world, would decline over the next few decades. Thankfully, net immigration has had a positive impact on population growth and is expected to add 1.5 million persons annually to the U.S. resident population from 2010 to 2020. However, even with a net positive immigration rate, the U.S. population grew at an anemic 1.1 percent annual rate from 2000 to 2010 and is projected to grow at an even slower 0.98 annual growth rate from 2010 to 2020 (Toossi, 2012).

In addition to slowing population growth, the overall U.S. labor force participation rate (the percentage of the working age population in the labor force) for men and women is declining. After peaking at 67.1 percent in 2000, the overall labor force participation rate declined to 64.7 percent by 2010. Furthermore, as the labor force continues to get older due to aging baby boomers, the labor force participation rate is projected to decline even more. The prime age work group, those between the ages of 25 and 54 years old, has the highest labor force participation rate, which in 2010 stood at 82.2 percent, whereas the 55-years-and-older work group has a much lower participation rate, which in 2010 equaled 40.2 percent. The oldest of the baby boomers reached the age of 55 in 2001, and for each passing year thereafter, there has been downward pressure on the overall participation rate. Looking forward, the BLS estimates that during the 2010 to 2020 time period, the participation rate will keep falling, reaching 62.5 percent in 2020 (Toossi, 2012).

The one silver lining to this negative trend is aging baby boomers are expected to have a higher participation rate compared to previous generations, which is expected to keep the rate from declining further in the future. In 2000, the participation rate for the 55 and older work group was 32.4 percent. A decade later, the rate rose significantly to 40.2 percent and is projected to keep increasing to 43.0 percent by 2020. However, the result of a combined slowing population and declining overall labor force participation rate has been a dramatic slowing of the U.S. labor force growth rate. Between 1990 and 2000, the U.S. labor force grew only at a 1.3 percent annual rate, followed by an even slower growth rate of 0.8 percent from 2000 to 2010. Based on current projections, the labor force growth rate will continue to slow well into the future. It’s projected to grow at a 0.7 percent annual rate during the 2010–2020 time period (Toossi, 2012) and an even slower 0.4 percent annual rate during the 2020–2050 time period (Toossi, 2002).

These massive population shifts impacting U.S. labor force trends portend difficult times for businesses trying to compete in a global economy. As their pipeline of talent continues to slow, U.S. businesses are simultaneously facing the fact that 80 million or so baby boomers (those born between 1946 and 1964) are rapidly approaching retirement. More than one-half of those aged 62 and older are already moving into retirement. Over the next 10 years, approximately 40 percent of the U.S. labor force will be eligible for retirement. Generation X (those born between 1965 and 1979) is only slightly more than one-half of the number of the baby boomers. Thus, from 2008 to 2018, the percentage of 25–54-year-olds in the labor force will decrease from 67.7 percent to 63.5 percent, whereas the percent of 55 plus year olds will increase from 18.1 percent to 23.9 percent (BLS, 2009).

The BLS is projecting that from 2008 to 2018, the number of job openings resulting from individuals retiring and leaving their jobs will be more than double the number of new job openings due to economic growth. The key question is whether there will be enough of a supply of talent with the range of skills necessary to both replace these workers and fill new positions (BLS, 2009).

Workforce Education Trends

The United States is witnessing a significant decline in the labor force growth rate, just when companies need human capital more than ever due to demands brought about by both technological and global trends. To make matters worse, the quality of the U.S. labor force is also declining. High school graduation rates peaked at 77 percent in 1969, declined to 70 percent in 1995, and have not improved since this time. A study conducted by the OECD ranked the United States 16th out of 21 OECD countries for high school graduation rates. The United States was ranked 24th out of 30 countries in science and 25th in math. National surveys of working age adults in the United States age 16 years of age and older indicate a large number lack sufficient literacy and numerical skills needed to fully participate in an increasingly competitive work environment (Kirsch et al., 2007, Educational Testing Service [ETS], 2007).

The U.S. Department of Education estimates that 60 percent of all new jobs created over the next two decades will require skills that only 20 percent of the current workforce possesses (Augustine, 2007). Yet the current educational system in the United States is ill prepared to meet this challenge. A 2011 report issued by American College Testing (ACT) Inc. shows only 45 percent of U.S. high-school graduates who took the ACT assessment exam were considered prepared for college-level math. Only 30 percent were prepared for college-level science. It is the deficiency of early education for U.S. students that has led high school graduates to be unprepared for highly quantitative majors in scientific, technological, mathematic, and engineering fields. As a result, a trend exists of students initially opting-out and dropping out of these highly in-demand majors (Light and Silverman, 2011).

In addition to being ill-prepared, students entering college are not putting in the time and effort needed to be successful. A study conducted by Richard Arum and Josipa Roska of New York University and the University of Virginia, respectively, discovered that American students study, on average, 12 to 13 hours per week. This is approximately one-half the time that students in 1960 spent studying (Light and Silverman, 2011). In a research paper sponsored by the ETS, the authors predict that by 2030 the average literacy and numeracy levels of the U.S. working-age population will decrease by approximately 7 percent (Kirsch et al., 2007).

In other words, over the next 20 years or so, as better educated individuals leave the workplace, they will be replaced by those who on average are expected to have lower levels of skills. During this same period of time, nearly one-half of the projected job growth will be in occupations that require complex skills (Kirsch et al., 2007, ETS, 2007). According to a 2008 study by the Society for Human Resource Management, 58 percent of HR professionals reported that a growing number of workers lack competencies needed to perform their jobs, up from 54 percent in 2005. Further, more than one-half of the respondents predicted that workers entering the job market in the next 10 years will lack the competencies necessary for them to be successful in the workplace (Society for Human Resource Management, 2008a). According to a 2009 McKinsey report, the growing educational achievement gap is the equivalent of a permanent recession. It continues that the U.S. GDP would have been approximately $2.3 trillion higher in 2008 had the United States succeeded in closing the international achievement gap 25 years earlier (McKinsey, April 2009).

If these trends continue, the outcome will be a continuing divide between the haves and have-nots based on skill level and job prospects. There will also be continuing upward pressure on wages for high-skilled jobs as the demand for talent for these jobs exceeds the supply. Conversely, there will be continuing downward pressure on wages for low-skilled jobs as the supply of immigrants and workers in low-wage economies exceeds the demand for this type of work. It is estimated that a worker with a bachelor’s degree today will earn 1.73 times more in lifetime earnings than a high-school graduate. This ratio of lifetime earnings increases to 3.36 for individuals with a professional degree (Baum and Payea, 2004).

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