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News & Analysis US

Aging, Automation, and Other Labor Market Issues

September 3, 2014, Wednesday, 05:46 GMT | 00:46 EST | 09:16 IST | 11:46 SGT
Contributed by Raymond James

One of the key characteristics of the current economic expansion has been the decline in labor force participation. Some of that has been attributed to the aging of the population – baby-boomers stepping into retirement – but is that what’s really going on? The polarization of the labor market is a growing issue. Technological advances have divided the workforce into high-skill, high-wage positions and low-skill, low-wage positions. However, this polarization may simply be due to the severity of the economic downturn. And the unemployment rate? Well, it’s really not all that accurate.

Labor force participation is down by more than 3 percentage points since the recession began. That’s equivalent to about six or seven million missing workers. Some of that decline has been attributed to an aging workforce. The Federal Reserve has suggested that the aging of the population accounts for about a third of the decrease in participation. White House economists put it at about half. However, the Household Survey data show that participation for those aged 55 and over is actually a bit higher than before the recession and has been trending roughly flat. The decrease in participation has been more pronounced among younger workers, although prime-aged workers (25-54 years) have also experience a decline in participation.

Older workers have been more likely to continue working. One theory suggests that many were looking to their homes as their main retirement vehicle. With the housing collapse, these potential retirees have presumably had to work a little longer (perhaps a lot longer) to fund their retirements.

The recession and gradual recovery has been especially hard on teenagers and young adults. These individuals are not getting the job experience that they would normally get in a strong economy, and their wages are likely to be generally lower for decades. This isn’t a problem unique to the U.S. It is a worldwide issue.

Technological advances have long played a key role in economic growth, but improvements have often met a mixed reception. For example, the Luddites, an early 19th century group of textile artisans, were known for smashing labor-saving textile machinery (the term “Luddite” now refers mockingly to individuals who shun new technologies). The rise of computer technology has generated concerns over the last several decades that many occupations would be made obsolete. However, as David Autor, an MIT economist and author of one of the more interesting papers presented at the KC-Fed’s recent Jackson Hole conference, notes, “journalists and commentators overstate the extent of machine substitution for human labor and ignore the strong complementarities.” Short-term job losses due to rising productivity have eventually been more than offset by subsequent employment gains.

The polarization of the labor force over the last couple of decades has been clear, but while technology has played a part, there have been other important factors, principally globalization and the economic downturns that followed the tech bubble and housing collapse. As the economy continues to recover and labor market slack is taken up, polarization should be less of an issue. Still, education is sure to remain the most important factor in labor market outcomes.

The more mind-bending aspects of Autor’s paper have to do with the more recent advances in technology. Throughout their development, computers have excelled at doing logical, ordered tasks. They haven’t done so well in using judgment. Autor quotes the philosopher Michael Polanyi: “we know more than we can tell.” Tacit understanding often exceeds explicit understanding, according to Autor. A doctor may study physiology and anatomy, but it is his experience that allows him to practice medicine. A driver’s manual may tell one how to drive a car, but the actual task is much more complex than following a simple set of rules. For computers this is beginning to change. Advances in artificial intelligence allow computers to learn more like a human would (and much faster). Combine that with the rapid progress in robotics, and the future looks to be a fascinating place (or at least until Skynet becomes self-aware). Jobs will be lost in this transition (cab drivers, for example), but other jobs will come along, typically things we can’t even imagine right now. In 1900, 41% of U.S. workers were employed in agriculture. By 2000, this share was 2%.

Finally, it’s common knowledge that the decline in labor force participation has biased the unemployment rate lower. However, there’s also some evidence that respondents have been more reluctant to respond correctly to government queries. Hence, the unemployment rate is even less valid. That’s why we focus on a wide range of labor market indicators.