A Coming Labor Shortage? The Evidence Just Doesn’t Support It

By Peter Cappelli and Bill Novelli

Some pundits assert that a labor shortage is coming that will be so severe that employers will have to scramble to find any employees. They will be desperate to hire older workers — or anyone else for that matter — and the discrimination we observe in the workplace will simply evaporate.

There is no evidence to support this view. The facts about what we know are simple. The only credible forecasts of the future labor force are those produced by the government’s Bureau of Labor Statistics (BLS). They suggest that the U.S. labor force will continue to grow through 2015 at roughly the same rate as in the previous decade.

After that, the rate of growth in the labor force will begin to slow, albeit not by a lot — two-tenths of 1 percent per year. The estimates themselves are based on some hard measures — how many young people will be moving into the adult ranks in each period; some reasonably solid estimates — how much improvement we will have in life expectancy and trends in immigration; and some pretty “soft” measures. Among the soft and uncertain measures are the labor force decisions that older workers will make.

U.S. labor force is NOT declining

The forecast of a slowdown in the growth of the labor force is based on a slowdown in population growth but also on the assumption that labor force participation rates for the labor force as a whole will actually decline into the future, despite increasing for older workers.

To be clear, the U.S. labor force is never projected to decline, although pundits often get that wrong; it is only the rate of increase that is expected to slow. (A good counter to those who worry about an apocalyptic decline in the U.S. population is to point out that the largest high school graduating class in U.S. history was . . . 2008.)

Note that these forecasts were based on the state of the world in the early 2000s, before the financial crisis, before the later Social Security age had begun to take effect. If the labor force participation rates for older Americans increase at all, as the arguments above suggest that they will do, then the overall U.S. labor force will expand much faster than even these government forecasts anticipate.

Whether we will have a tight labor market in the future depends primarily on the demand side, on whether the economy will be growing or shrinking. The reason is that changes in the supply side, demographics and the labor force that results, happen quite slowly, with more than enough time to adjust to them. Changes in demand, on the other hand, happen quickly, dramatically, and unpredictably.

To illustrate, the United States lost 2.5 million jobs from September through December 2008, while the demographic changes discussed above amount to a change in the labor force of a hundred thousand or so individuals over the course of a year. The ability to predict where the economy will be even a year out, let alone decades into the future, has been dismal.

Long term effects from the Great Recession

The 2008 financial crisis, the “Great Recession,” is likely to have a longer-term effect on older workers that goes beyond the decline in jobs.

Many more older individuals are likely to stay in the labor force — and those who have already retired are likely to come back in—because the declining value of their investments makes it more difficult for them to afford to retire. A 2009 survey of workers age 50 to 64 finds over 50 percent reporting that they plan to postpone their retirement three or more years longer than they had expected as a result of the economic crisis.

We can also get some sense of what the response to the effects of the Great Recession will be on retirement plans by looking at what happened after the 2001–2002 stock market slide.

The decline in the stock market during that recession of 34 percent was roughly the same as the decline during 2008. As a result of that decline in the stock market, the percentage of people who otherwise would have retired fell by about 2 percent in the following year, and the percentage of people who were retired and came back into the workforce rose by 1 percent. That was a combined 3 percent change in the year following the market decline.

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If the rates of return in the stock market then returned to their historical level, estimates suggest that retirements would have declined an average of 2.5 percent per year over the next four years. It turns out to be quite difficult to estimate the number of people who retire every year, but for the sake of simplicity, let’s say it is 1 million. The 2001–2002 stock market decline would therefore have added 130,000 older workers to the labor market in the four years after.

Because the stock market decline in 2008 was just about the same size, the number of older workers added to the labor force would be roughly the same number as well. The composition of that group of added workers is a little different from the average in that it would include more high-wage individuals as they would be more likely to rely on investment income.

Employers will always need workers

Whether or not the economy as a whole will be up or down in the future, employers will always need workers. And every generation, the pool of workers available to them changes. There is an entire industry devoted to understanding the special needs and interests of each new younger generation of workers entering the labor force.

Dozens of books try to tease out the differences among Millennials versus Generation Y versus Generation X, despite the fact that each one of these groups represents only a trivial part of the total workforce. In contrast, older individuals represent a huge and growing proportion of the population. As we will see later, most of them want to work and are either looking for a new job or looking to recontract employment arrangements with their current employer. They are, as a group, experienced, skilled, and conscientious. Why aren’t we paying more attention to them?

The explanation for not paying attention to older workers focuses less on rational calculations of costs and benefits by employers and more on psychological factors, including discrimination. Even if labor markets will be so tight in the future that employers will need all the workers they can get, we know from history that this is unlikely to solve the problem of discrimination.

The 1950s and 1960s experienced the tightest sustained labor markets in U.S. history, yet discrimination against women and minorities remained widespread. Economists frequently argued that employers were paying a price when they discriminated by avoiding qualified workers who could be hired at a lower price and that the market would punish them into dropping their restrictive hiring.

But it didn’t happen. It took political pressure and then social pressure to change the attitudes of the individuals making employment decisions before discriminatory practices began to erode.

Reprinted by permission of Harvard Business Review Press. Excerpt from Managing the Older Worker: How to Prepare for the New Organizational Order by Peter Cappelli and Bill Novelli. Copyright 2010. All rights reserved.

Peter Cappelli is the George W. Taylor Professor of Management at The Wharton School and Director of Wharton’s Center for Human Resources. He is the author of Talent on Demand, The New Deal at Work, and coauthored The India Way. Contact him at cappelli@wharton.upenn.edu. Bill Novelli is the former CEO of AARP and the author of Fifty Plus: Give Meaning and Purpose to the best time of Your Life.

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