Part 1 – Population Demographics: The decline in the U.S. workforce

We have very low unemployment and there is a shortage of workers.

Typically, this is blamed on Covid-19 and/or pandemic policies. Both had an impact on employment but there is a bigger factor that is overlooked – and that is the number of young workers is in decline just as older workers are simultaneously leaving the workforce.

We can see this with a population pyramid chart. The rows to the left of center represent the relevant number of males in the population, by age group, and those to the right, the number of females.

First, note the decline in the population from about age 30 and down, and especially form age 15 and down. We no longer have a growing population – and the impacts of this are seen today as a labor shortage – a shortage that is likely to get worse.

This is a snapshot of the U.S. population as of 2022. In a moment, we look at some past years so you can see how these curves have changed over time.

Notably, look at the curve for the “under age 30” groups. The follow-on generations are smaller than the preceding generation. Below age 15, our population is crashing.

In fact, the U.S. fertility rate is well below the population replacement level – our population is on path to shrink (excluding immigration). We will revisit this in a future post in terms of what this means to our economy and society – there are big changes in our future!

Let us look at the population pyramid for 1984. In the mid-1980s, I was about 25 years old. Note the very large “bulgde” the population between the ages of 18 and 34, although partially extending almost to late 30s. This is the “baby boom” bulge caused by World War II. After the war, U.S. couples began to have families again – and many children were born in the 1950s extending to the early 1960s.

This large cohort came of age simultaneously, seeking to attend college, seeking jobs and buying homes. In the early to mid-1970s, the price of single family homes began to sky rocket in the U.S. – because of the huge demand from the “baby boom generation”.

Next, let’s advance to 1996. This “baby boom” group has now moved on to roughly ages 30 to 45. This group is now having their own kids in the late 1980 to early 1990s.

In the mid-1990s, unemployment was again considered low – but it had little to do with government policies. Instead, it was because new job seekers in their 20’s (see age 18 to age 28) were far fewer than the preceding generation. In fact, there were about 6 million fewer in the generation following the baby boom bulge.

What we see here is:

• The impact of World War II extends all the way to today in the 21st century as an unusually large cohort of older workers leaves the workforce for retirement. This was the “baby boom”.
• The “Baby boom” also created a baby boom “echo”, which can be seen in the 2022 population pyramid above, creating the bulge around age 30 in 2022.
• The “bulges” and “troughs” in the population affect the supply of labor. This in turn affects the wages paid for labor.

Population demographics are, obviously, impacting the labor market, but so too are effects of pandemic policies.

• In 2020, an estimated 40 million workers were laid off or furloughed during ineffective “lock downs”. While many jobs came back, a few million did not. Many older workers (age 55 and up) were unable to find comparable work and either voluntarily or involuntarily ended up retired. The effect was several million older workers left the workforce – this shows up in workforce participation rates, by age.
• Some chose to leave the work force over fears of catching Covid and have not returned to work.
• Simultaneously, there are fewer new workers entering the workforce because there are simply fewer young people.
• And, during Covid there were travel restrictions that reduced the import of immigrant labor into the U.S.
• Many countries worldwide are experiencing similar labor shortages – and generally, these all trace back to World War II. In fact, Russia has announced a program to pay mothers to have more babies.

Going back to the 2022 chart and a shrinking labor pool among those below age 25, what impact do you think this has on wages?

In my semi-rural area, retail stores and restaurants are offering $18-$21/hour for unskilled labor, with benefits including medical, dental and tuition benefits. Pay is up sharply from a few years ago. This is also why prices have skyrocketed. Just last year, my wife and I, who only eat at inexpensive restaurants while traveling, were typically paying $20-$24 for the two of us; this summer, the price for two is $30 and up.

These sharp changes in population demographics will have significant impacts on many aspects of our lives in the years to come:

• public schools
• universities
• whether a college degree is as important in the future
• the cost of housing
• immigration
• travel options
• Investment options
• The adoption of automation.

And more.

These impacts will be discussed in a future post.

UPDATE: A few days after I wrote this, Elon Musk made comments that this issue is bigger and more important than climate change. Similarly, a few days later, the NY Post has run a column about the challenges of a shrinking population.

The Population Demographics Series

• See list: Population Demographics – Coldstreams Business and Tech