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Fewer people of working age can slow the economy. Will it increase wages?

In this May 26, 2021 photo, a sign for workers hangs from a store window along Main Street in Deadwood, SD. is reaching retirement age and thousands of people have died from the coronavirus. (AP Photo / David Zalubowski)

WASHINGTON (AP) – As the U.S. labor market rebounds this summer and the need for workers intensifies, employers likely won’t have a chance to relax anytime soon. Labor shortages are likely to persist for years after the economy quickly reopens in its growing pains.

Consider that the number of people of working age did something last year that it had never done in the history of the country: it went down.

Census Bureau estimates showed that the U.S. population aged 16 to 64 fell 0.1% in 2020 – a slight decline but the first decline of any kind after decades of steady increases. This reflected a sharp drop in immigration, the retirements of the vast baby boom generation and a slowdown in the birth rate. The size of the 16-64 age group has also been shrunk last year by thousands of deaths from the coronavirus.

A year earlier, in 2019, the working-age population had essentially plateaued.

It is not entirely clear how demographic trends will play out once the pandemic is completely over. But even if the working-age population begins to grow again, it will almost certainly do so at an anemic rate. A continued decline in this population, or even a lukewarm increase, would pose a problem for the economy. Healthy economic expansion has always depended on robust population growth to fuel consumer spending, justify business expansion, and boost corporate profits. Without a large influx of new workers, growth could stagnate.

Yet some economists foresee a silver lining for individuals: Fewer working-age people could force companies to be more competitive in hiring and retaining employees. And that could mean higher wages, better opportunities and other incentives to retain and attract workers, a trend already evident in the June jobs report released by the government on Friday. Average hourly wages increased 3.6% from a year ago, faster than the pace before the pandemic.

“The workers would fare better than the economy as a whole,” said Manoj Pradhan, founder of Talking Heads Marco, an economics research firm and former Morgan Stanley economist.

If wages were to rise sharply, it could also help reduce the vast inequality that increasingly separates the wealthiest Americans from the rest and leaves lower-income households struggling to pay rent, food, and child care. children and other essential expenses.

With slow population growth, economic expansion would depend on the ability of companies to make their workers more productive. An increase in productivity, often achieved through investments in labor-saving technologies, could further increase wages. The standard of living would increase even if the economy struggled to grow at what is normally considered a healthy pace.

Last year, the number of legal and unauthorized immigrants entering the United States fell for the fourth year in a row to less than 500,000 – less than half of the 2016 level – according to calculations by William Frey, a demographer at the Brookings Institution. The death toll jumped 8% to more than 3 million, largely reflecting the impact of the pandemic.

A fundamental long-term drag on the working-age population is the exit of the huge baby boom generation from the workforce. The number of people aged 65 and over is likely to increase by 30% over the next decade, Frey said.

“We’ve never really been in this type of situation before,” he said. “There just aren’t enough (of young adults) to replace the people who are leaving.”

The situation has been exacerbated this year by a wave of early retirements. About 2.6 million people who worked before the pandemic now say they are retired and not looking for work, according to the Federal Reserve Bank of Dallas. Strong increases in stock prices and home values ​​despite the deep pandemic recession have allowed many older Americans to exit the workforce earlier.

One of them is Jeff Ferguson, a physician with Eli Lilly & Co. in Indianapolis, who retired in April at age 59 after 22 years in the business.

Having worked from home during the pandemic, Ferguson said, made the transition easier. But it was also encouraged by its strong investment gains and the strengthening of the local real estate market despite the economic uncertainty.

“I probably retired with a tailwind rather than retiring with a headwind,” he said. “If I had sensed a headwind, I might have delayed it.

The pandemic has also given him a new perspective on life and retirement. Ferguson plans to travel across the country with his wife, a pediatrician, and catch up with loved ones.

Gad Levanon, an economist at the Conference Board, said the decline in the working-age population will be particularly evident among Americans without a college degree. As aging baby boomers retire, they are being replaced by younger workers who are more likely to be university graduates. Blue collar workers – anyone without a four-year degree – will become rarer. This trend is likely to create labor shortages in industries such as manufacturing, construction, retail, restaurants and hotels.

Levanon estimates that the number of university graduates will continue to grow by around 2% per year, despite the population slowdown, while those without a university degree will decline. This could make it more difficult for future college graduates to find jobs that match their level of education. Businesses can also inflate their job demands, perhaps requiring bachelor’s degrees for jobs that previously didn’t require them.

“The number of people willing to work in blue collar and manual service jobs is declining,” Levanon said.

Wages are already rising faster for low-paid workers. For the lowest-paid quarter of workers, hourly wages rose 4.2% in May from a year earlier, according to Federal Reserve Bank of Atlanta. That’s more than double the percentage increase these workers received in the four years after the Great Recession, from 2010 to 2014, and more than a quarter of the richest workers.

Scott Seaholm, CEO of Universal Metal Products, a 285-person metal stamping company near Cleveland, is surrounded by an aging population and is desperate to get young people interested in a career in manufacturing. A study found that about 59% of the population in Lake County, Ohio, where he is based, was made up of working-age adults in 2015, Seaholm said. This proportion fell to 57% last year and is expected to reach 54% in 2025.

“It’s quite shocking,” he said. “There’s no one there to work. It’s a little ugly.”

More than half of the workers at its three factories are over 55, he said, with less than one in five aged 20 to 34. He has an 81-year-old employee who still works in a punch press.

Seaholm’s company is part of a group that encourages high school students to consider factory jobs. He opens his factories to high school students once a year on “Industry Day” and tries to bring in their parents too.

“They want Johnny and Judy to go to college,” he said. “It’s all locked up in their heads.”

Globally, the workforce in most other countries is aging as well, including China, which once seemed to offer an endless supply of workers. Japan’s population declined for a decade.

Pradhan said this trend could potentially benefit American workers. Since the end of the Cold War in the early 1990s, hundreds of millions of people in China, Eastern Europe and India have joined the global workforce, thus maintaining the wages of less skilled workers and prices under control.

Now the aging of much of the world could reverse these trends, Pradhan and Charles Goodhart, a former economist at the Bank of England, wrote last year in a book called “The Great Demographic Reversal: Aging Societies, Waning Inequality, and an Inflation Resumes. “

Pradhan notes that in Japan, whose population has shrunk by around 1% per year for a decade, economic growth has averaged only 1% per year. But that means the growth per person was 2%.

If the United States could achieve that level of efficiency when its population grew only 0.5% per year, its economy could still grow at a healthy rate of 2.5% per year, Pradhan said.

Yet over time, he and other economists fear that slow population growth means less consumer spending and a less vibrant economy.

“Workers generate innovation and ideas – they invent things,” said Kasey Buckles, professor of economics at the University of Notre Dame. “When you have a shrinking working-age population, you have fewer people doing this.”

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AP Business Writer Anne D’Innocenzio contributed to this New York report.

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Mary Cashion

The author Mary Cashion