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Labor Market Trends and U.S. Competitiveness

Labor is a critical factor of production—its supply, allocation, and demand—and is thus a central component of a nation’s economic competitiveness. The last century of American growth could be broadly summarized as a succession of labor market waves that reshaped all three dimensions of production:

  • Supply: The high school movement in the first four decades of the 20th century and the mass entry of women into the labor force beginning mid-century boosted aggregate labor supply.
  • Allocation: Rising postsecondary enrollment and periods of immigration from countries around the globe altered the allocation of the labor force in terms of skills.
  • Demand: Technological change, especially the information technology revolution, shifted overall demand for workers and created new skill-specific needs.

Today, concerns over U.S. competitiveness have raised pressing questions over labor supply, its allocation, and demand for workers.

  1. Supply side and allocation issues: Will there be enough workers—and enough workers with the necessary skills? Business leaders from the C-suite to Main Street continue to express concern over a squeeze in labor supply exacerbated by the COVID-19 pandemic. This short-term challenge is rooted in longer-term demographic trends, with baby boomers continuing to age and retire, and a slowing birth rate, which promise to shape the labor market for years to come.
  2. Demand side issues: Will there be enough need for workers? Rapid advances in the capability of artificial intelligence (AI) tools have raised both fear and anticipation regarding the impact on the quantity and distribution of jobs.

As policymakers wrestle with these questions, they should consider pathways to expand labor supply and participation and address the potential impact of emerging technology on the labor market.

Supply and Allocation Challenges

Over the first two decades of the 21st century, as a falling share of Americans worked or actively sought work, the main question regarding labor supply was, “why is labor force participation falling?”

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Figure 1. Source: Bureau of Labor Statistics, via FRED, Reserve Bank of St. Louis.

In January 2001, the U.S. labor force participation rate stood close to its peak. From there, it fell five percentage points by September 2015, then rose in subsequent years with economic expansion. Unsurprisingly, labor force participation fell during the pandemic. It has steadily recovered since then but remains notably below pre-pandemic levels. There remain millions of “missing workers,” keeping the overall labor market tight.

Researchers have identified various factors contributing to these trends. Some point to demand-side drivers such as outsourcing, trade, and automation. Others cite supply-side factors, including skills deficits, the opioid epidemic, and disincentives created by some safety net programs. Even as the participation rate has fluctuated, labor force composition has shifted. Since 2001, the decline in labor force participation has been much steeper for men than women and for high school graduates than those with college degrees.

Looming over all of this is an aging and slow-growing population, which will weigh on aggregate labor force supply. Many economists expect declines in fertility and overall population growth to constrict the supply of American workers. And while labor force participation for workers over age 55 is significantly higher today, at 38.4%, than in 2001 (32.8%), the “great retirement boom” of the last few years and continued aging of baby boomers may reverse that trend.

In response to these trends, policymakers have sought ways to attract those on the margins of the workforce (such as those with criminal records), lower barriers for those who would like to work (through, for example, licensing and credential reform), and expand the pipeline of new workers (such as through targeted immigration policy).

The aggregate supply question is also complicated by the issue of allocation: are there enough workers with the requisite skills and abilities to fill available jobs? BPC has highlighted shortages of qualified workers in construction, behavioral health, rural health care, and early childhood facilities. The U.S. Chamber of Commerce has analyzed what it calls the “Great Reshuffle,” with workers quitting jobs and finding new ones at high rates. This squeezes some sectors, such as food service, that continue to have high levels of unfilled job openings. Implementation of the CHIPS and Science Act of 2022 has also been confounded by availability of qualified workers in the semiconductor industry. In many ways, these are symptoms of lagging labor supply as workers see more leverage to switch and seek more flexibility and higher pay in a tighter labor market.

Will AI Take All the Jobs?

There must also be jobs for workers to fill. Startling leaps in AI capability have led to various projections of which occupations and tasks might be most exposed to disruption and substitution. Research consistently finds that, in prior periods of technological advance and job displacement, demand for workers did not decline, as productivity rose and new types of jobs were created. While there is always a “this time is different” cast to periods of rapid technological change—usually leading to exaggerated claims of mass unemployment—the potential of generative AI suggests real challenges for workers.

New tools appear to have the potential to replace a range of human occupational tasks, with job automation estimates in the millions. The impact will be uneven; some studies find that women will bear the brunt of the AI employment impact. Others proclaim that AI will have the “exact opposite” impact, with abundant job creation. Policymakers have expressed bipartisan concern over AI’s impact on jobs as well as a desire to understand what constructive role policymakers should play.

Policy Opportunities

Labor supply, allocation, and demand can be useful lenses to examine policy solutions:

  • Supply: Attention might be paid to barriers that obstruct labor market entry, such as lack of access to paid family leave or tax code disincentives. Orienting workforce development and education programs toward in-demand jobs and lifelong learning will be critical to preparing generations of workers for the continuously evolving labor market.
  • Demand: Focus might be on distributional aspects of the tax code or ways to promote business creation. The categories overlap: efforts to train more workers on use of AI tools (allocation) might also mitigate demand concerns.

Public and private leaders know that the labor market is central to U.S. competitiveness. Employers of all types and sizes have called on policymakers to help address shortages in skilled or qualified workers. The CHIPS and Science Act included funding for workforce development. In its implementation, the Commerce Department has emphasized local collaboration between employers, education and training organizations, and government.

On Capitol Hill, while labor market issues are dealt with by various committees of jurisdiction, there is a strong signal emanating from both sides of the political aisle to reposition workforce policy. Senate Majority Leader Schumer (D-NY) has made workforce a key part of his push for new competitiveness legislation. The House Select Committee on China has examined the impact of international economic competition on American workers. In hearings about AI, members of Congress invariably raise employment concerns. The bipartisan National Apprenticeship Act presents another opportunity for policymakers to address the labor market challenges. Two major legislative reauthorizations also loom: the Workforce Innovation and Opportunity Act and the Perkins Career and Technical Education Act. Both have been passed with bipartisan support in the past.

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