The Future in Focus: Relieving Labor Strains

This is the second in a series on the economic and financial ramifications of the aging trend of this country's population. The first article1 appeared last month and it explained how increasing longevity and low birth rates would, over the next 20–30 years, create a huge overhang of dependent retirees in the population and a relative shortage of working-age people, a situation that would make it fundamentally difficult for the nation to fund pensions of almost every kind and would also impair the economy's growth prospects. That earlier piece touched briefly on the ways that the country could alleviate these strains, some domestic and some international. This second in the series takes up the domestic sources of relief, increased labor productivity, and increased participation in the workforce.

Getting More Out of Each Worker

One clear way to alleviate the impending relative shortage of skilled workers is to get more output out of the workforce the economy will have. If output per hour were to increase at 3% per year, for instance, even a static workforce would produce almost 35% more after 10 years. Of course, productivity growth at such a pace would rival the record during some of this country's most dynamic years, but it does show the potential.

The two best means to productivity increases are innovation and capital investment in equipment and facilities. Sometimes, the innovation acts alone, the introduction of a new technology or simply more effective ways of doing things. Such advances can raise the output per hour of both workers and equipment. (Economists refer to this effect as "total factor productivity.") More often, advances in labor productivity come through increased capital spending by business, because it puts more productive power at each worker's disposal and because new equipment frequently embodies technological advances.

Either way, the best source of support from this quarter will come from more spending on research, innovation, and equipment. Fewer links are clearer in the historical record than between such spending and subsequent surges in labor productivity. In the 1980s and 1990s, for instance, the United States enjoyed a leap in technological applications. Business spending on equipment, systems, and software rose from 7.8% of the overall economy in 1985 to almost 10% in 1999.2 After a slight lag during which business implemented the new ways of doing things, output per hour surged in manufacturing by a startling 5.1% a year between 2000 and 2005, more than half again faster than in the prior 20 years. Though the figures for the overall economy were less impressive, they, too, showed a marked acceleration.3

To some extent, such productivity advances will occur naturally as the population ages. As explained in the first number in this series, the relative shortage of skilled workers will tend to raise wages and so impel business to get as much output out of each expensive worker as it can. Of course, the burden on profits from such wage pressure will limit the financial wherewithal available to business for such spending, but access to global financial markets should remedy such deficiencies by giving firms alternative financing options to internal sources.

Though much of this productivity gain will depend on the foresight and imagination of each private actor, government can facilitate the process in three ways: 1) it can ensure that a free flow of global financial capital remains readily available to business interests; 2) it can reform the tax code to encourage capital spending and innovation, by reducing tax burdens generally and by liberalizing depreciation and expensing rules; and 3) it can revisit the grants and partnerships it pursued successfully during the Cold War and the so-called space race, though its motivation was different then.

Working Harder for Longer

The economy can also get more output out of its existing population through a greater involvement in paid work. Despite adverse demographic imperatives, there is a considerable potential from getting older workers to extend their careers and in bringing more women back to the workplace. The benefit from the former is obvious. If more people work beyond the traditional retirement age of 65, the economy not only avoids a loss of workers that would otherwise occur but it also slows the flow of new people into the ranks of dependent retirees. As far as women are concerned, there is more potential than meets the eye, for though past decades have seen a flood of women into the workplace, women's participation in paid work still remains considerably lower than men's of comparable age. In the United States, apart from cyclical ebbs and flows, some 81% of working-age men on average either have jobs or actively seek work and 90% of men in the prime age bracket, 25–54. The comparable figures for women are 69% and 76%.4

Some of this increased participation, from either group, will occur naturally, as increased wages from the relative shortage of skilled labor makes paid work more attractive. Elders might also stay in the workforce without additional encouragement because their pension arrangements are inadequate. There are signs that this is already occurring. Participation by men and women older than 65 has increased, from 15% in the 1980s to 21.5% more recently.5 But the economy can get still more out of each group by altering workplace practices. The alterations aimed at older workers will differ from those that help women return to the workplace, but the changes will likely occur as the demographic pressure intensifies in coming years.

Where women are concerned, the crucial issue is an accommodation of family obligations, particularly children. Though modern societies have long ceased viewing child care as the sole preserve of mothers, the reality is that women still shoulder the bulk of these obligations. In most cases, the often conflicting demands of work and family explains why women’s participation rate is not already higher.6 It would seem, then, that business and government can respond to the mounting demographic pressure by offering more affordable and reliable child care arrangements. Companies and government also could turn to more flexible work schedules to help the primary care giver in each family better juggle work and family obligations. Indeed, Washington has already acknowledged a need to make such changes in its labor regulations, though to date it has done nothing.7 Tax incentives for child care might help, too. Some companies might lure workers with on-site child care. Especially in places where large numbers of workers gather, it might recommend itself as a cheaper way to bring in talent than through straightforward wage hikes, still more if the provision of child care also enables the company to save on taxes. Matters may go so far that localities allow parents to enroll children in schools near their places of work instead of near their homes, though that would require a change in school financing arrangements.

The changes needed to keep older workers on the job would take on a different character. Here the emphasis would lie with more flexible schedules that allow shorter hours or a truncated work week. Older workers have neither the physical stamina to continue full time in some occupations nor the desire to work with the intensity of younger workers, who retain the dreams of advancement that older workers have either already achieved or have long abandoned. This sort of modification might seem straightforward enough for all but the most hidebound managements, yet it has a difficult side. It would require an end to the seniority approach to pay that has dominated corporate and government life for longer than any can remember. This well-entrenched system gives the highest wage or salary at each level to the worker with the longest tenure, presumably because that worker's longer experience has value. Management would have to abandon that wage structure in order to allow older workers to step back from full-time arrangements but still remain on the job. Some firms have made strides in this area, but the widespread use of older workers will require a difficult adjustment throughout business and government.

Still Not Enough

Combined, these measures have the potential to relieve some, but not all, of the demographic burden. As the first of this series described, a simple extrapolation of demographic trends, with no change in other arrangements, would reduce the working population from 5.2 for each retiree today to 3.0 by 2030. If the rate of women’s participation were to rise half way to the men's and the average retirement age were to rise from 65 to 70, the workers available to support each dependent retiree in 2030 would rise to 4.5, a 40% improvement over what would otherwise occur. Adding some acceleration in the pace of productivity growth to the mix could push that relief up to 50%, maybe slightly more.8 But as welcome as this would be, it would still fall short of what is necessary to protect the nation’s prosperity. Fortunately, the economy has other, internationally oriented, sources of relief. One is immigration, and the other is a quantum leap in trade and globalization. The next number in this series will take up these remedies.

* All the analysis in this number and this entire series comes from a new book, Thirty Tomorrows, due out in April 2014.

1 Milton Ezrati, "The Future in Focus: Our Demographic Destiny," Economic Insights, November 25, 2013.

2 Department of Commerce.

3 Department of Labor.

4 Ibid.

5 Ibid.

6 Sorca M. O'Conner, "Women's Labor Force Participation and Preschool Enrollment: A Cross-National Perspective 1965-80," Sociology of Education, January 1988.

7 Sue Shellenbarger, "First Lady to Speak at White House Workplace Flexibility Forum," The Wall Street Journal, March 31, 2010.

8 Calculation drawn from Milton Ezrati, Thirty Tomorrows (Thomas Dunne Books: New York; forthcoming 2014).

The opinions in the preceding economic commentary are as of the date of publication, are subject to change based on subsequent developments, and may not reflect the views of the firm as a whole. This material is not intended to be relied upon as a forecast, research, or investment advice regarding a particular investment or the markets in general. Nor is it intended to predict or depict performance of any investment. This document is prepared based on information Lord Abbett deems reliable; however, Lord Abbett does not warrant the accuracy and completeness of the information. Consult a financial advisor on the strategy best for you.

© Lord Abbett

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