Smaller labor force means slower economic growth.
A smaller or slower growing labor force implies slower economic growth because the output of the economy grows when more people are producing, when more capital (equipment and machinery) allows the same number of people to produce more, or when knowledge/technology/skill levels improve and allow greater productivity per worker. So unless productivity is increasing to compensate, a shrinking or slow growth labor force means slower economic growth.
There are several reasons a labor force can shrink or grow slower. Some relate to economic conditions, some relate to demographics, and some (such as the current situation) seem to have an unexplained element.
Nationally, population trends have meant slower labor force growth as lower birth rates over the past few decades and as baby boomers reach ages where labor force participation starts to decline.
New Hampshire benefited from strong population growth in the '70s and especially '80s and '90s. That provided a strong boost to our economy, especially since much of that population growth was the result of immigration from other states by skilled, well-educated individuals (a good characterization of our in-migrants from other states is a two-wage earner, married couple family, probably both college educated with children). That migration added tremendous talent to our labor force and made New Hampshire an attractive location for many businesses looking to employ skilled workers.
The labor force grows or shrinks by population growth in the working age population, or by changes in labor force participation (those of working age who choose to be in the labor market or not). New Hampshire and the U.S. have seen slower population growth in the working age population, but more disturbingly, both have seen a decline in the labor force participation rate.
If your working age population isn't growing, you better be sure to have high labor force participation rates.
New Hampshire has had very. high participation rates compared to the U.S. because of our favorable demographics (few people who traditionally have lower levels of participation--minorities, those without a high school diploma, etc.) and because our population overall has higher levels of education, which are associated with labor force participation, and women in New Hampshire especially tend to have higher participation because of higher levels of education and lower fertility rates (childbearing means lower labor force participation).
Participation always drops during recessions as workers get discouraged and drop out. Among older men without a postsecondary degree, participation has been declining for a couple of decades as changes in the economy have reduced the demand for less skilled or technology dependent workers.
What is especially troubling today is that labor force participation continues to be weaker even as the economy has improved. Some has to do with demographics as more of the working age population ages into groups with lower participation rates, but participation seems to be lower among most age groups (although participation among those with higher levels of educational attainment seems to have held up best).
The best explanations of why labor force participation has continued to be lower than in the past is that the skills required by the economy have been changing, making many workers less qualified than before and creating more discouraged workers.
I think that is part of the issue, but it doesn't seem to fit the fact that participation rates dropped during the recession and haven't recovered--I don't think the "skills gap" could have so abruptly hit the labor market; rather it has been a growing phenomenon.
Whatever the reason, it is a huge issue because when population is growing slowly, it is critical to have high rates of labor force participation in order to have solid economic growth.
For New Hampshire, population growth has been a strength during the '70s, '80s and '90s. Participation has also been our strength. We still have high relative participation, but it has declined similar to the U.S. pattern and without population growth, New Hampshire could have much lower economic growth than we have been accustomed to, unless we figure out how to reverse the fiend.
Economist Brian Gottlob of PolEcon Research, Dover, can be reached at firstname.lastname@example.org. This article originally appeared in Foster's Daily Democrat.
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|Title Annotation:||N.H. ECONOMY|
|Publication:||New Hampshire Business Review|
|Date:||Jan 10, 2014|
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