A Shrinking U.S. Workforce Is Stifling Economic Growth

The economic recovery from the Great Recession has been achingly slow, with unemployment staying well above the 7% mark despite long-running support from the Federal Reserve in the form of quantitative easing. Will we ever get back to where we once were, pre-financial crisis?

Unfortunately, the answer seems to be a resounding no. Experts note that, since the crisis began, the nation's Gross Domestic Product has fallen precipitously, and there is no real indication that things will be looking up anytime soon.

The reason? An ever-dwindling labor force, which included 866,000 discouraged workers as of August. To make things even tougher, those remaining on the job are being hobbled by a lower rate of productivity.

The financial crisis disabled the job market
As this chart shows, the labor force participation rate in the U.S. has been dropping off quite alarmingly since the financial crisis kick-started the recession in 2007. 

Source: Bureau of Labor Statistics.

This is distressing for many reasons, not the least of which is that the nation's economic growth is being stunted, right along with the ebbing size of the workforce. A recent Forbes articles points out that, compared to the 2.99% average annual growth experienced during the years 1998 to 2007, the country's GDP only grew by an average of 0.73% from 2008 to 2013.

According to economists at JPMorgan, the future doesn't look much brighter. In a recent research paper, economist Michael Feroli notes that the primary ingredients necessary for economic growth -- an expanding workforce and increasing workplace productivity -- are missing since the recession, and a comeback to pre-recession levels isn't probable.

Where did all the workers go?
There are several reasons for the contraction of the labor force, one of which is the makeup of the population. Feroli points out that there are fewer working-age persons in the labor pool these days because of decreases in immigration and the fact that baby boomers are retiring in droves. This makes sense, of course, but what about all those workers who have just stopped looking for work?

JPMorgan economists David Kelly and Brandon Odenath, in yet another report, claim that the reason so many have dropped out of the job pool is because they now collect Social Security disability benefits. Indeed, the Heritage Foundation notes that fully 6% of the U.S. adult population was receiving disability benefits in 2012, compared with 5.3% in 2007.

A third reason for the declining workforce is that many more Americans are now enrolled in college -- 6.6% in 2012 compared to 5.8% in 2007. While notable, this seems the least problematic of all, since these persons are most likely preparing to enter, or reenter, the labor force.

Productivity is suffering, too
There is another issue, however, and it directly impacts the nation's withering GDP. Feroli notes that for those currently employed, productivity isn't what it used to be. This isn't the fault of the workers, but is because employers are not keeping up with technological advances that can improve workplace productivity.

Part of the problem is that technology isn't improving at the breakneck pace it did during the 1990s, when productivity was gaining. This translates into less spending by companies that don't feel the extra expense is worth the minimal increases in innovation. This has the effect of dampening research and development, as well.

Not the whole story
Excluding the college attendees, the main reasons for the disappearing workforce are retiring baby boomers and the higher numbers of persons on disability. But, doesn't the lack of job opportunities weigh in here, too? The aforementioned experts give this issue short shrift, but I think it's central to the reduced-workforce problem.

For instance, Kelly and Odenath purport that those collecting Social Security disability payments are not actively looking for work. This is certainly true, since drawing disability severely restricts employment opportunities. But the authors seem to disregard the idea that recipients of disability benefits may have decided that the depressed job outlook made their chances of securing employment too low to contemplate. The Bureau of Labor Statistics reported in May of this year that, of the 23 million unemployed persons with a disability, over 80% said their disability was the greatest barrier to employment. Education, the next biggest barrier, was cited by only 14% of respondents.

As for baby boomers, the notion that their retirement is crimping the labor pool seems iffy at best. If the problem was a mere dearth of workers available to fill positions, then why is the youngest contingent of workers -- those aged 16 to 24 years -- experiencing a dismally high unemployment rate of 16.3%?

Comparatively, for workers aged 55 years and over, the rate of unemployment is a teensy 5.1%, even though the BLS deems this group to have the lowest workforce participation rate. It seems that many of the youngest members of the labor pool are not being offered job opportunities available to those who entered the workforce before them, which is only adding to the problem.

Can this trend be reversed?
With a shrinking workforce causing such injury to the nation's economy, changes need to be made. The most obvious one is for employers to take advantage of the available labor pool consisting of young people ready and willing to work.

It also seems apparent that companies need to invest more heavily in technology. While the pace of innovation may have slowed somewhat over the past decade, there is nonetheless a clear need to upgrade -- as evidenced by the reductions in labor productivity from 3.2% from 1996 to 2004 to only 1.5% from 2005 to the present.

Once again, the impetus for change lies with the U.S. business community, which must make adjustments if the economy is to thrive again. Doing so will be beneficial to workers and businesses, as well as investors -- who, as Kelly and Odenath note, will be affected by limited earnings growth. Workers and investors are standing by, ready to do their part. Let's hope American companies are willing to meet the challenge.