A New Labor Regime

A labor shortage is looming, which is an undiscovered country for this generation of workers. The U.S. experienced tight labor markets from the end of WWII into the 1960s, but then an influx of baby boomers & women into the labor force, followed by globalization of some labor markets, cooled demand and lowered labor costs for the next half century. Today we are on the cusp of a seismic shift. All the assumptions of your working life will now be OBE’d.

Throughout the working lives of most people employed today, unemployment rates of 6-7% were normal, even desirable. I entered the labor force in late 1973. NEVER did the unemployment rate dip below 5% and it was often closer to 10% - until 1997. Ten years ago unemployment unexpectedly dipped below 5% and stayed low. This is a monumental change. Our current unemployment rate (4.5%) is lower than the unemployment rate during ANY of the 25 years between 1973 and 1998. We are in a new world of employment.

As the linked article explains, labor shortages are showing up throughout the economy. We have become accustomed to seeing ads on billboards and on television seeking workers. This is an unbelievable when you recall to the situation in the 1970s or 1980s, and it will get better (or worse depending on your point of view).

Labor has been cheap for a generation for obvious, but sometimes overlooked, demographic reasons. The baby boom generation is so big and has been so pervasive that we have come to think of it as natural, but it is not. It was a demographic bulge, which was vastly augmented by large numbers of women entering the paid workforce and staying there. This bulge was largely "digested" by around 1990, but at that time the great American leap in productivity began to kick in, reducing demand for labor and postponing the reckoning. These things, BTW, are "good." But they do have consequences for the labor force and wages.

Now these trends are shifting rapidly into reverse. The baby boom generation has begun to leave the labor force. Their departure will accelerate until around 2025 when most of them will be collecting Social Security. The subsequent generations are smaller. Demographic trends are easy to predict. Productivity gains are harder, but it is unlikely that we can continue the torrid pace we have enjoyed in the past few years, which is significantly higher than that of comparable developed economies. This means fewer workers at a time when more are needed.

Is this trend good or bad? It depends. It is both and neither. We can expect real wages to rise (good) which will increase unit labor costs (bad). It will be easier for new workers to find work (good) but some may be enticed into the workforce before finishing higher education (bad). The baby boom is a very well educated generation partly because they stayed in school in the face of poor employment options.

My own speculation is that the tighter labor market is generally a good thing. It will change society in many ways. I believe older workers will stay in the labor force longer, as firms are willing to accommodate the flexible schedules they demand in order to keep these workers and their skills from walking out the door. This will ameliorate the problem of Social Security. Younger workers will have more choices . The skilled among them are unlikely to tolerate the jerks and bullies in the workplace, so work life will improve.

The labor shortage will NOT decrease inequality. Many good things lead to inequalty. Think back to the example of the late 1990s. Inequality increases with economic growth and tight labor markets as the premium paid for skills & talent increases. The labor shortage will raise the general level of welfare as real wages increase. People are less concerned with inequality when they are doing better themselves, but at some point inequality itself may create tensions nevertheless.

We need to adapt to the new labor paradigm. Most of our thinking in the last generation has been to protect & create jobs, sometimes even at the expense of efficiency. In the new paradigm, we will need to think about how to replace jobs with better techniques & technology.

Every generation of Americans has lived better than their parents. When I was in college in the 1970s, people feared the end of that progress. President Carter talked about the crisis of confidence and said we would have to limit our aspirations. Many agreed. We hear this talk every generation. This generation is no different, but I can say with reasonable confidence that my children are coming into a much better labor market than I did. There will be challenges, but life will be better for them. It will be a new labor regime, however. The sooner we get used to that and adapt, the better for everybody.

Posted by Jack at April 4, 2007 8:50 PM
Comments
Comment #215134

With skilled labor leaving the work force, the effects will be realized very quickly. After all, the Dims have been dumbing down education for so long it will never catch up to skills necessary in the work place. Not in our lifetime. The baby boomers leaving the work force will not put a crimp on social services as we will not be depending on government for our living. If it goes away no big deal most of us realized long ago we cannot depend on government for much. The next gen of workers will be seriously strapped to get good jobs as they have no skills to offer. Flipping burgers and busing tables am not skills. Most cannot even read!

Posted by: im at April 5, 2007 8:14 AM
Comment #215171

Jack: I’d also observe that the tight labor market has altered the attitude of even skilled workers, as far as their expectations of what they have to provide for their paychecks. I have looked for jobs during several recessions. As a result, I appreciate the fact that I am employed and figure that employment is not a right. My observation of the under 30 skilled persons in our business (and whom have always been in the driver’s seat as far as jobs) is that they are not particularly concerned about their ability to get a job. As result, they think it not big deal to show up at 9:00 or later (for a business that nominally starts at 8:00), if it suits what they have done the night before or may need to do that day. Our foreign-born employees have a more traditional attitude. Your post may indicate that there may never be a “wake up call”, even if there was a recession, since there will likely be a skilled worker shortage even then.

Posted by: Mike in Tampa at April 5, 2007 11:02 AM
Comment #215183
the Dims have been dumbing down education for so long

LOL! Where have you been for the last 12 years?

Flipping burgers and busing tables am not skills. Most cannot even read!

…or compose a grammatically correct sentence, apparently.

Posted by: American Pundit at April 5, 2007 11:59 AM
Comment #215190

AP

We really should not bother people about typing mistakes. We are interested in the arguments.

Posted by: Jack at April 5, 2007 12:24 PM
Comment #215200

I couldn’t help myself. :)

BTW, what’s the argument? Are you saying that we should happy that American companies are finding labor overseas or in the form of millions of illegal immigrants?

Posted by: American Pundit at April 5, 2007 12:52 PM
Comment #215208

I do not have an argument. My point is that the labor system we have lived with all our lives has made a fundamental shift. We will have to adjust our thinking and our policies.

Those who favor labor should probably be happy, since labor will become relatively more valuable.

I do not want to make im’s argument for him, but I think he is saying that despite the favorable environment, many Americans will be unable to compete because of their lack of skills.

If you read the linked article, you see that this labor shortage (for reasonably skilled workers) is worldwide. I smart, skilled American worker will have the best prospects that anybody has had in the last 40 years.

Posted by: Jack at April 5, 2007 1:21 PM
Comment #215225

Jack,
I basically agree with your statement and views. Good post. A few aspects come to mind, such as future immigration impact, the trend among “richer” countries to opt for smaller families, which BTW has already put us at 2.1 in terms of new births per woman, and the increasing longevity of the average American.
If immigration would be throttled back appreciably our labor shortage would get much worse sooner and the average income levels would probably suffer as well. Education does play a vital role in our future putting “good” jobs out of reach for an ever larger percentage of the unambitious. Lastly the consequences of increasing longevity must be aggressively discussed in my opinion, to explain to everyone that no economy can afford to pay retirees (I’m one of them) for 20 to 30 years on the average. Not if we have to compete in a world market place with different ideas about what jobs are worth.
Fred

Posted by: Fred Engel at April 5, 2007 2:14 PM
Comment #215227

Jack,
I basically agree with your statement and views. Good post. A few aspects come to mind, such as future immigration impact, the trend among “richer” countries to opt for smaller families, which BTW has already put us at 2.1 in terms of new births per woman, and the increasing longevity of the average American.
If immigration would be throttled back appreciably our labor shortage would get much worse sooner and the average income levels would probably suffer as well. Education does play a vital role in our future putting “good” jobs out of reach for an ever larger percentage of the unambitious. Lastly the consequences of increasing longevity must be aggressively discussed in my opinion, to explain to everyone that no economy can afford to pay retirees (I’m one of them) for 20 to 30 years on the average. Not if we have to compete in a world market place with different ideas about what jobs are worth. Hence, we all must prepare to work longer. I did to age 72.
Fred

Posted by: Fred Engel at April 5, 2007 2:19 PM
Comment #215229
Those who favor labor should probably be happy … If you read the linked article, you see that this labor shortage (for reasonably skilled workers) is worldwide

Yeah, I remember reading that SEIU leader Andrew Stern is supporting the labor movement in China. The sooner those guys are making union wages, the better off American workers will be.

How come we haven’t insisted on Chinese or Central American or South Korean or Singaporean unions in our free trade agreements?

Posted by: American Pundit at April 5, 2007 2:19 PM
Comment #215261

AP

I suppose because we cannot dictate exact society wide relationships to other countries. What is our unionized worker percentage the private sector these days - about 7-8%? Down from something like 30% a generation ago. Unions are a bit old fashioned. I would not want foreigner to force us to make union agreements. I suppose if we wanted to make them less productive, we might push them in the unionization direction.

Workers are better off if they are skilled. I think we have some stake in that. Unskilled workers are a drag on the society in many ways. But unionization is not particularly beneficial.

Posted by: Jack at April 5, 2007 5:55 PM
Comment #215267

The labor shortage will never occur. Recession will come first. Problem solved.

Posted by: David R. Remer at April 5, 2007 6:21 PM
Comment #215278

David

The skilled labor shortage is here already.

Posted by: Jack at April 5, 2007 8:24 PM
Comment #215297

Nah, that is an education shortage, not a labor shortage. If we invested in education half of what we invest in war, we would have a far more entrepreneurial and innovative economy and less war.

My Mom used to say it only takes two idiots to fight. And it only takes one smart person to rally a crowd around him, and the idiot slinks away.

This country buys more junk that ends up in the trash within weeks or days of purchase than any 3 other nations combined. Education would eliminate a lot of that waste in the economy and renew our ability to create and export our innovations.

As always, such issues rest with the core and fundamental values. America has failed in many ways to upgrade her values to accomodate the changes of the last several decades. More and more, we are becoming a nation of waiters, in which most of us wait on the needs of each other. It is called the vastly growing service sector.

If a nation of waiters is what we want, we only need to preserve last century’s educational system. If we want to lead the 21st century, education is the only way - and on a massive scale. But, that won’t happen as long as politicians want to divide America on such issues in order to compete for office and campaign reelection funding. How self-serving our politicians have become - and how duped so many eligible voters have become.

D.a.n I fear, is correct, it may take a cataclysm to wake America from her living to work, stupor. A prolonged recession would do that. Or a single nuke set off at the right place would also do it.

The fundamental fact of being the wealthiest nation on earth is this: we should be working to live comfortably, relatively leisurely, and happily as a people; not living to work in servitude to others. It is a shame that such a very small percentage of Americans have the capacity to live according to the wealthiest nation status our country has enjoyed.

But, the opportunity is slipping away from America to Japan, China, and India where they may, or may not, choose to appropriately adapt to a wealthiest nation status in the latter half of this century. Education investment is a big part of what is shaping their future and through competitive advantage over us, ours as well.

Posted by: David R. Remer at April 6, 2007 12:06 AM
Comment #215314

David

I think you overestimate other countries and underestimate your own. People respond to their condidions and there are different work ethics, but Americans are among the hardest working and smartest workers in the world. No man is a prophet in his own villiage and we tend to see look at ourselves too closely to see the truth.

Read the link in my sources article. Even if the U.S. froze its growth rate at 2000 levels, it would take until 2015 for a rich country like Germany to catch up with our per capita wealth. China and India will not catch up any time in the our lifetimes. Remember that even if China’s GDP is equal to ours, it takes a billion and a half Chinese to produce what 300 million Americans can.

And China’s growht cannot continue as it has. Their enviroment will simply collapse if they continue to do as they have. Beyond that, if you look at the link in this article and the one about aging populaiton in my sources group, you see that the key to Chinese success - cheap labor - will be drying up within a few years.

Mind you, I am not saying that the U.S. has a perfect system. What we have is a very adaptive one. Think back to the 1980s. We restructed our entire industrial base in those ten years w/o anybody outside those who study management even noticing. We have that capacity to remake ourselves. That is why all the report of our imminent doom have not been accurate. At the same time, Japan has been mired in recession for a decade and still not managed to restructure.

When you travel outside the U.S., you quickly come to appreciate the average U.S.standard.

Posted by: Jack at April 6, 2007 8:16 AM
Comment #215401
I suppose if we wanted to make them less productive, we might push them in the unionization direction.

Oh, that’s right. You’re afraid of unions because you think union members are all illiterate, knuckle-dragging thugs.

Posted by: American Pundit at April 7, 2007 12:07 AM
Comment #215415

AP

I have seen that unions impose inefficient work rules that favor the slowest and the laziest employees as long as they are members and have a lot of seniority.

My personal experience with unions is mixed. My father was a union stewart. He was a smart guy. On the other hand, I was threatened by union thugs when I questioned “daunion”. That was years ago. Maybe they have changed. But more recent experience with unions indicates that my first statement is still accurate.

Posted by: Jack at April 7, 2007 1:39 AM
Comment #215489

Jack
Your father was a smart guy. I have read your “union thug” story and believe you were easily imtimidated and mis-understood the situation. The decent working conditions you enjoyed were not free but the result of much hard work and struggle. You were just asked to pay your fair share.
The blanket statement that unions introduce inefficiencies is an overstatement. It is comparable to saying that all company owners are misers that do not care about their employees welfare. Sometimes true but often not.In CA for example nearly all highway projects are union. We lay down highway at less cost per mile than any other state even though most states pay workers less.Some of this is skill level but even more is the simple fact that high wages force contractors to be inovative and invest in more efficient methods.
As the next generation of workers comes forward unprepared we will be paying the price of the stagnant wages that forced both parents into the workforce. When we were young there was always a parent around to make sure we did our homework etc. Now when you visit a nieghborhood during work hours they are like ghost towns. We are sending forth a generation of latchkey kids. This is not “good”.
APs point of calling for union rights in our trade agreements is a good one. Collective bargaining is the only way for these workers to ever be able to afford to buy stuff from us some day. If that is not the goal of globalization then why on earth should we want to even have trade treaties?Why should we rush into it?

Posted by: BillS at April 7, 2007 7:47 PM
Comment #215490

Jack
PS
I read an interesting new fact last week in the financial section. Seems the EU stock market has slightly surpassed the US in capitalization for the first time since WW2. I don’t know what that means but it means something.

Posted by: BillS at April 7, 2007 8:04 PM
Comment #215492

Good post and comments!

I question whether pulling people out of the education system early because of a good labor market is necessarily a bad thing. My opinion is most people who earn impractical degrees should be working instead. Impractical degrees such as art history are great but they historically are a way for the rich to obtain the culture that their peers expect them to have. People that need to work for a living should get a job or study a practical degree. A tight labor market will be a good thing because it will pull people into the labor market rather than having them buy a degree they can’t afford and that won’t help them in their future.

Posted by: Keith at April 7, 2007 8:12 PM
Comment #215516

BillS

I have thought about that incident many times. I do not think I misunderstood. It was a fairly clear situation, although you may be right that it was a couple of guys freelancing.

I support the right to unionize - or not - depending on the choice of the employees involved. Of course, you have to see it in the dynamic environment. An employer has the right - within the law - to resist.

BTW - I think we should be willing to pay high wages for high skills. This is NOT my problem with unions. When you describe your union skill training, it looks like a way you add value and skill.

What I do not like is interference with mangement. As a manager, I want to choose the best person for the particular job. I want to consult employees, but it should be a management choice. Seniority etc, should make no difference. It is like deciding who should sing tenor in the choir. It does not matter who has the most seniority or who is next in line.

Keith

As a person with a degree in ancient history and an MBA I can see both sides of your arguement.

Posted by: Jack at April 8, 2007 1:20 AM
Comment #215611

Jack your response to mine, seems to me very naive on a number of points.

First, America didn’t adapt in the 1980’s. Capitalists just internationalized, matruing a trend that had begun with the movie “The Ugly American” and the period following WWII and the Marshall plan.

Haliburton is moving to Dubai - not unique. A very large number of quote unquote American companies are rapidly becoming foreign companies and foreign companies are taking over market share in America. America is selling herself like a low dollar prostitute with no capacity to see and plan for her future.

In the 1980’s, what it would have taken for America to reinvent herself was to respond appropriately to dependency on fossil fuels after the 1970’s oil embargoes. Also, going Green then, instead of 10 years from now, would have been reinventing America and getting out in front of foreign nations with technology they were going to need from us.

China is producing and selling more fuel efficient vehicles than the US does. China has been actively engaged in seeking ways to reduce airborne contaminants as has the U.S. Japan went Green when the U.S. should have for vehicles, and now owns the hybrid marketplace.

America reacts, and only in ways that don’t ask for short term profit sacrifices for longer term investments in future demand markets. That is where the other emerging and industrialized nations are acquiring competitive advantage over us. The are proactively seeking future demand and markets, while we are still reacting to problems without solutions that began 3 decades ago.

Posted by: David R. Remer at April 8, 2007 6:47 PM
Comment #215676

David

During the 1980s we restructured our whole industrial base. There was a significant difference is basic management in 1990 versus 1980. That is why U.S. productivity remains so high and continues to grow.

Re China - you cut them way to much slack. You judge the U.S. on results and China on stated intentions. The comparison is not valid that way. China is clearly the dirtiest large country in the world. Taking a deep breath in most Chinese cities is a serious health hazard. The most polluted U.S. cities such as Houston or LA would not make the top ten in China on their worst days.

In fact, I believe environmental degradation will be one of the things that slows Chinese growth in the next decade. The other thing is the labor crunch (ironic isn’t it).

Posted by: Jack at April 9, 2007 8:30 AM
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