THE RESILIENCE AND FLEXIBILITY of the American labor market is one hallmark of our economic recovery. Seven years after the financial crisis, the U.S. economy continues to create more than enough jobs to meet labor market demands, and the flexibility of our labor market has helped the U.S. maintain its longstanding role at the global nexus of innovation and industry. Going forward, a strong job market should support income growth for most American households, while also improving the fiscal health of the economy through increased tax revenue.
However, today's labor market is quietly being transformed by cyclical and structural forces. There is more part-time employment, more reliance on technology and global inputs, slower wage growth overall, and faster job growth in the service sector than in manufacturing. As we explore those forces in this article, we note reasons for both optimism and concern.
Cyclical trends: demographic shifts and a tepid recovery
At least two cyclical factors are transforming our labor market: the shifting demographics of our labor force and a very moderate economic recovery. These two factors, in turn, are reflected in the gradual decline of the labor force participation rate, which now sits at the lowest level since the 1970s.1
First, as the labor force population cycles through the baby boomers to the millennials, workers' preferences change about how much and how they want to work. Baby boomers are aging out of the labor force and, despite their increasing tendency to work past the traditional retirement age, roughly 11,000 boomers are retiring every day, adding to the nonworking population. This lowers the labor force participation rate.2
Additionally, women aged 25 to 54, who pushed up the participation rate in the 1970s and 1980s as they joined the labor force en masse, are now joining at a slower pace. They are having fewer children, and as a result the future working-age population will be smaller than that of older generations, weighing on the labor force participation.
Demographics are also putting job tenure in flux. Gone is the era of joining a company at age 25 and staying there until retirement. Now American employees increasingly work for more employers throughout their career, and according to the Employee Benefit Research Institute (EBRI), the median tenure for males aged 55 to 64 fell from roughly 15 years in 1963 to 11 years in 2014. Millennials are half as likely as boomers to stay with a single employer. Surveys by Ernst & Young find that millennials prioritize benefits and flexible schedules over pay, a tendency that may change the type of jobs they are willing to take.
Second, the deep recession and tepid recovery since 2008 have also weighed on the labor force participation rate and influenced work preferences. Economic circumstances have delayed the millennial generation's launch into the job market. While millennials surpass even the boomers in numbers, so far they have tended to defer employment and to opt for more education, further weighing on the labor force participation rate.
We have entered the gig economy—a greater share of Americans work part-time, which offers a less predictable work schedule.
We have also entered the gig economy. A greater share of Americans now work part-time, many in jobs with just-in-time scheduling that offer a less predictable work schedule. Economists explain this increase—which has most directly affected single men and women with no level of education beyond a high school diploma—as mainly a residual effect of a deep recession and the tepid recovery. The Bureau of Labor Statistics finds that the percentage of those who are employed part-time peaked at near 15% after the recession but has since crept down to 12% with the recovery. That's still above the precrisis level of 11%.
Structural trends favor services, not manufacturing
Structural trends in the economy and industry have affected traditional "middle skill" jobs—those jobs that require more than a high school education but less than a four-year-college degree. Over time, this may increase the polarization of the job market between low-skill and high-skill jobs and widen income inequality.
Our economy is adding service sector jobs at a much faster clip than manufacturing jobs. Since 1992, there has been a net gain of 30 million service jobs, while the number of manufacturing jobs has not increased. The trend is accelerated by demographics that drive the demand for health care services and by the globalization of production and labor markets generally. Going forward, our economy is projected to produce many more jobs in health care and professional services than in manufacturing. Firms have cut costs by offshoring manufacturing processes and sourcing cheaper labor in global markets. Yet there are bright spots, including a recent "re-shoring" of manufacturing production to the U.S. in certain high-value-add industries such as chemicals and transportation goods, according to Boston Consulting Group.
Advances in technology and robotics are decreasing the demand for middle-skill jobs. For example, the integration of computers is slowing the creation of certain jobs, from bank teller to taxi dispatcher. Meanwhile, advances in robotics are eliminating jobs in manufacturing. BofA Merrill Lynch Global Research estimates that industrial robots will likely perform nearly half of all manufacturing tasks by 2025, up from about 10% today. This trend echoes the 20th century replacement of agricultural workers with farm machinery and pesticides.
In the last 10 years, the number of industrial robots has risen 72%, while the number of U.S. manufacturing jobs has gone down 16%.
Separately, labor markets are also affected by the decreasing share of workers covered by collective bargaining agreements. This probably has muted wage growth and made employment less secure, and further contributed to the slower growth of middle-skill jobs.
While cyclical forces should abate, structural forces will persist
The influence of certain cyclical factors is probably easing as the recovery progresses. Near term, this implies more spending power for the median household and slightly higher inflation. However, longer-term structural shifts are firmly rooted and likely imply more downward pressure on wage growth and more technology disruption for lower-skilled workers.
As labor markets shift, central bankers admit that monetary policy cannot address structural trends that weigh on wages or increase income inequality. Solutions typically lie in fiscal policies, such as investment in education and retraining workers for deployment in growth sectors or funding productive infrastructure projects that generate employment for less-skilled workers.
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1 Labor force participation is the proportion of the population aged 16 and up who are working or looking for work.
2 Atlanta Fed economists find that the decline in labor force participation is not due to discouraged job-seekers giving up, but rather to people who do not want jobs.