National Clothesline

The combination of demographics, technology and psychographics all contribute to shaping our future workforce. However, demographics is the most important factor.

Today, demography is pointing toward drastic changes that will reshape our basic

assumptions about consumers and employees.

The most significant change is that the aging Baby Boom generation will result in a labor shortage that could bring the economy’s growth to a standstill. Why is this happening? To maintain a stable population, a country must have a birth rate of 2.1 children per female.

Based on assumptions being made by the U.S. Bureau of Labor Statistics, when Baby Boomers start retiring in 2010, annual labor force growth will slow from 1.2 percent to 0.6 percent. And it will continue to decelerate down to 0.2 percent between 2015 and 2020, before recovering to 0.3 percent between 2020 and 2030.

Looking at the longer term, labor force growth during the next 50 years is expected to average 0.6 percent, about one-third of the 1.6 percent annual pace of the past half-century.

For most business owners, abundant labor has been pretty much taken for granted. The last time American businesses faced a peacetime labor shortage of this magnitude was during the economic boom of the 1830s, before a depression reduced labor demand and an influx of immigrants from Germany and Ireland increased the supply.

A report from the Urban Institute, “Economic Consequences of an Aging Population,” says that “Over the next 40 years, the share of prime working-age adults will decline from about 59 percent of the population to about 56 percent. The share of older adults (65 and over) will increase from just over 12 percent to almost 21 percent of the population.

This isn’t just a long-term problem. It is a situation that demands your attention now. In fact, we could begin feeling the effects as soon as 12 to 18 months from now.

Although the slowdown is not expected to start until 2010, if economic growth remains strong, businesses could experience a much tighter labor market within a matter of months. Today the unemployment rate is 5.1 percent, which is relatively low. However, unemployment could fall below five percent as soon as 2006.

First, consider slower growth in the overall labor force. It’s generally assumed that the main cause will be Baby Boomers retiring, but another important factor is a leveling off of women coming into the labor market.

According to a Bureau of the Census report entitled, “Women in the United States: A Profile,” from 1950 to 1990, the proportion of working-age women who were in the labor force nearly doubled, from 30 percent to 57 percent. However, the March 2000 “Current Population Survey,” from 1990 to 2000 said, the proportion only went from 57 percent to 60 percent. And estimates say that it’s held steady since then.

Second, consider the graying of the workforce. The prime-age workforce, consisting of workers aged 25 to 54, is growing much more slowly than the total labor force. These workers are the biggest contributors to the overall economic growth of the country. Workers under the age of 25 are less experienced and less productive because they are still learning their jobs.

Finally, consider the skills gap. In the 1960s and 1970s, the Baby Boomers who entered the workforce were better educated than the workers they replaced. But more recently, new workers are only at the same educational level as retiring workers. Immigrants who are joining the U.S. workforce are less educated, on average, than American-born workers.

What this means is that the big gains in productivity that U.S. businesses have made, due to increased education, are likely to level off, because today’s workforce is only slightly smarter than yesterday’s.

Based on all of this information, where is the economy headed? Over the past 10 years, our Gross Domestic Product (GDP) grew 3.3 percent. Growth should slow to 3.0 percent in the next decade. And it will probably slow more, to 2.3 percent, between 2014 and 2024.

At the local level, the economies of certain states, namely Alabama, Iowa, Louisiana, Nebraska, North Dakota, Ohio, South Dakota, West Virginia, and Wyoming, are expected to remain flat or even shrink, along with their workforces.

It hard for most people to appreciate the difference between the forecasted 2.4 percent average GDP growth rate over 20 years and the 3.3 percent rate we’ve experienced on average since 1955. However, assuming that you have a real income in 2005 dollars of $100,000 per year, the 2.4 percent rate would grow that to $161,000 in 20 years.

On the other hand, the 3.3 percent growth rate would grow it to $191,000, 19 percent difference!

This situation is not all that bleak. Let’s start with delayed retirement. Today, 20 percent of men aged 65 and over are still in the workforce.

There has been a radical shift in attitudes toward age and work. Many people in their 60s do not consider themselves to be “old,” mostly because they are more physically fit and mentally sharp than workers of previous generations who usually retired at 65.

Another solution is to compensate for the worker shortage by selective immigration. In 2002, about one million legal immigrants and half a million illegal immigrants entered the United States. Most of these immigrants fill jobs that American-born workers do not want.

Service businesses will not be hurt as badly because they can compensate by cutting back on employees. These businesses already depend on immigrants to fill many jobs, and they can supplement their workforce with less skilled, older Boomers, who aren’t ready or able to retire.