Although the current focus is on rising unemployment, demographic trends across the developed world (and indeed China) will create a historic shrinkage in new labor force entrants over the next decade. There will be far fewer teenagers entering the workforce, which with declining workforce participation rates in many countries (notably the US) and in the absence of mass immigration, has the potential to cause serious shortages and rising wages across many industries. The forecast shortage is about 18m workers in the US by 2020, based on the 17-59 age cohort in the working population and constant participation rates. The chart below from the GAO indicates clearly the dramatic decline in trend labor force growth about to hit us, with clearly negative implications for trend GDP growth and productivity. Although the offshoring trend across some service industries like IT support and accounting may alleviate this to some extent, many labor intensive industries like health care and education are not generally amenable to remote operation, however Utopian the visions of the tech gurus. Workers retiring later can also help at the margin, but with dubious productivity effects.
On the other hand, lower trend GDP growth and an aging population clearly have deflationary implications, as we have seen in Japan, as discretionary consumption shrinks and savings rise in line with the classic life-cycle theory. This is particularly the case when consumers have seen such huge personal balance sheet damage in the recent real-estate and stock market slump, diminishing their retirement income. So what will be the net impact of this huge structural shift and what are the investment implications?
A key issue is not just the declining number of new entrants, but their steadily declining educational attainment in terms of the percentage holding post high-school qualifications compared to new entrants in the 1970/80s. This is exacerbated by stricter conditions on skilled immigrant (H1B) visas post 9/11, leaving a potential skills gap in many high-tech manufacturing sectors. This is partly due to the relatively poorly educated Hispanic labor force growing by 29.9 percent, to reach 26.9 million by 2016, while the non-Hispanic labor force is projected to grow by only 5.1 percent over the period. This deterioration in labor force quality as well as raw numbers will be an inflationary factor at the margin.
An interesting trend in recent years is the decline in the number of adult Americans seeking employment, or the participation rate in the workforce. In fact, had participation rates remained steady at mid 1990's levels, the current unemployments rate would be over 10%. There are various explanations for this from the rise of the unofficial economy to changing gender roles and even obesity (a recent study from the Chicago Fed claims 40% of the decline is due to chronic health problems related to excess weight), but it's a social trend across many developed countries that most economists see continuing, again reducing the potential workforce though the next decade.
So the US economy will broadly have to cope with an influx of generally fatter, more ignorant new workers and not even enough of those. You don't have to be a labor economist to figure the impact on productivity. Against a background of huge money supply growth, greater government involvement in the economy at all levels, and a tendency to gradually monetize the 400% plus aggregate debt/GDP ratio, I expect that the net impact of the evolving US labor force must be to add to incipient inflationary pressures. My long-term strategy remains to hedge against those pressures with inflation hedges like quality resource/materials stocks and TIPS, a strategy that has performed stongly YTD. The relatively few highly skilled US college graduates offering themselves for employment will have substantial negotiating power over the next few years, particularly if they don't need a crane to lift them into their desks.
