CBO: Scarcity of Young and Females in Labor Force a Drag on Economic Growth

By Terence P. Jeffrey | December 5, 2012 | 1:20 PM EST

Mother and baby. (AP Photo/Chitose Suzuki-File)

(CNSNews.com) - The Congressional Budget Office has published an analysis of why recent economic growth—and, more tellingly, potential economic growth---has been less than half of what it typically has been in post-World War II recovery cycles.

Its conclusion: The single biggest factor slowing the growth of the potential Gross Domestic Product of the United States is declining growth in the potential labor force.

One reason for this is that some people have been out of work so long it may be difficult for them to return to the labor force or they may no longer want to return.

But other reasons are likely to have a more long-term negative impact on American economic growth: There are relatively fewer young people entering the labor force in America today than there used to be and the percentage of American women entering the labor force—which grew steadily in the first five decades after World War II--has peaked.

To put it in terms that the CBO did not use: The Baby Boom generation and its successors did not have enough babies, and the capacity of the American culture, economy and government to lure or push women into the work force who have had babies, or who have other reasons to prefer not working outside the home, has been exhausted.

“In the current recovery, both potential GDP, a measure of the underlying productive capacity of the economy, and the ratio of real GDP to potential GDP have grown unusually slowly,” said CBO in a November report entitled, “What Accounts for the Slow Growth of the Economy After the Recession?

“In the first 12 quarters after the last recession, both potential GDP and the ratio of real GDP to potential GDP grew at less than half the rate that occurred, on average, in the aftermath of other recessions since World War II,” said CBO.

“Potential output,” CBO explained, “is determined primarily by three factors: potential employment, potential total factor productivity, and the productive services available from the capital stock in the economy."

Of these three, it is “potential employment”—or the potential size of the labor force—that has been the greatest recent drag on potential GDP.

“By CBO’s estimates, the slower growth of potential employment, as compared with the average during previous recoveries, directly accounts for more than a third of the slowed pace of growth of potential GDP since the end of the last recession,” said CBO.

“Potential employment grew by 2.3 percent between the second quarter of 2009 and the second quarter of 2012,” said CBO. “That figure is less than half the 5.0 percent average increase during previous post–World War II recoveries, although it is close to the growth following the mild recession in 2001.”

Why is the potential employment of American workers growing more slowly than it did earlier in the post-World War II era?

“That slower growth of potential employment primarily reflects three developments,” said CBO. “The most important is that, since about 1980, demographic trends have slowed the growth of the population that is working age and, therefore, the growth of the potential labor force.”

“In several earlier recoveries, the baby boomers were entering the labor force; now, they are beginning to retire,” said CBO.

“Another important development is an end to the long-standing increase in women’s participation in the labor force, which had boosted the growth of the labor force in recoveries before 2000,” said CBO.

The third factor is that a larger number of people than in past recoveries have been out of work so long that they may never re-enter the labor force.

“Finally, the number of people who would be unemployed if output was at its potential level has risen in the current recovery,” said CBO. “An unusually large number of people have had their skills and connection to the workforce erode because they have been out of work for a long time. Some of those people will probably never work again, and it will take more time than usual for the rest to find suitable jobs.”

In 2011, according to the federal Centers for Disease Control and Prevention, the United States experienced its lowest birth rate ever recorded with only 63.2 births per 1,000 women age 15-44. The U.S. birth rate peaked in 1957, when there were 122.7 births per 1,000 women age 15-44.

The number of babies born in 1957—about 4,255,000, according to the Census Bureau—was greater than the 3,953,593 babies born in 2011.

Back in January 1948, the first month for which the Bureau of Labor Statistics has published data, only 32.0 percent of American women age 16 and older participated in the labor force—meaning they either had a job or had sought one in the previous four weeks. By January 1958, that had climbed to 36.8 percent. By January 1968, it hit 41.0 percent. In January 1978, it was 49.2 percent. In January 1988, it was 56.4 percent. In January 1998, it was 59.9 percent. And, in April 2000, it hit its historical peak of 60.3 percent.

In October, 2012, 57.8 percent of American women age 16 and older were participating in the labor force—a decline of 2.5 points from the historical peak reached more than 12 years ago.

It also noteworthy that men age 16 and older have also diminished their participation in the labor force. In January 1948, 86.7 percent of American men participated in the labor force. That percentage actually peaked the very next month—February 1948—at 87.0 percent. Since then, male participation in the labor force has gradually declined, hitting an all-time low of 69.8 percent in August of this year. In October, it was 70.3 percent.