Economic Progress

How the US can tackle unemployment

Line workers install the trunk on the flex line at Nissan Motor Co's automobile manufacturing plant in Smyrna, Tennessee, U.S., August 23, 2018. Picture taken August 23, 2018. REUTERS/William DeShazer - RC1C371372F0

The US must focus on reskilling workers or face severe skilled-labor shortages. Image: REUTERS/William DeShazer

Laura Tyson
Former chair of the US President's Council of Economic Advisers, Haas School of Business
Lenny Mendonca
Senior Fellow, Presidio Institute
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Economic Progress

Though the unemployment rate and jobless claims are currently lower than at any point since 1969, the US economy is still facing labor-market challenges that cannot be ignored. One stands out: the long-term decline in the US labor-force participation rate (LFPR) – a key factor in future growth.

In the late 1960s, 97% of all prime working-age men (25-54) participated in the labor force, but by 2018 their participation dropped to 89%, driven by the decline in labor-force participation of non-college educated men. Similarly, after steady gains, the participation rate for prime working-age women peaked at 77% in 1997, stagnated until 2000, fell during the Great Recession, recovered somewhat after 2015, and was 75% in 2018.

The trends in the United States differ from those in other advanced industrial economies. For example, using a broader age group (15-64), the male LFPR stabilized in Canada and the United Kingdom after falling between 1990 and 2000, while it declined further in the US. In 2018, the US rate was 78%, while the rate in both Canada and the UK stood at 82%. Trends in the female LFPR also varied across countries. Using this broader measure (15-64), the US female participation rate peaked at 70% in 1997 and fell to 67% by 2018. In sharp contrast, the female rates in both Canada and the UK have increased gradually since the 1990s, hitting peaks of 75% in Canada and 73% in the UK in 2018.

The decline in labor-force participation is not spread equally across the US workforce. It varies not just by gender and age, but also by education and geography, reflecting a variety of factors, including macroeconomic conditions, automation, incarceration, and opioid addiction. For example, according to the OECD, opioid addiction is a factor behind the decline of male labor-force participation in the US. Indeed, recent research suggests that the increase in opioid prescription rates between 1999 and 2015 could account for as much as 43% of the decline in the LFPR of prime working-age men.

The US labor-supply challenge is further complicated by rural-urban differences. As hosts to large institutional employers, cities tend to have lower unemployment, stronger population growth (particularly among younger cohorts), and more educated workforces. By contrast, in many small towns and rural areas, populations are aging, and in over half of all US counties, the population is shrinking.

Between 1963 and 2017, the share of US workers with a college or graduate degree rose from 12% to 39%, and the share of those with a high-school diploma or less fell from 75% to 33%. But the latter group suffers from higher rates of unemployment, lower LFPRs, and weaker earnings than their more educated counterparts. While the rural-urban gap in high-school completion rates has narrowed, the rural-urban gap in college completion rates is growing. Moreover, in terms of bothhigh-school and college graduation rates, Latino, African-American, Native American, and Alaska Native students lag far behind Asian and white students.

Given these demographic differences, the Federal Reserve Bank of Richmond estimates that by targeting women, non-college educated workers, and rural Americans, the US could add more than 18 million people to the workforce. For example, if the US raised its female LFPR to match that of Canada (where paid parental leave, affordable child care, and tax benefits/credits for parents and caregivers all make it easier for women to work full-time), the US labor supply would have 5.2 million additional workers.

Likewise, closing education-based gaps could add another ten million people to the US labor supply. The unemployment rate for high-school graduates is almost double that of college graduates. Yet, by 2025, two-thirds of all jobs will require education beyond high school. And, according to the Center on Education and the Workforce at Georgetown University, the US will already face a skilled-labor shortage of five million workers by next year.

Finally, by bringing the prime-age employment-to-population ratio in rural counties up to that of large metropolitan areas, the US could add 3.5 million people to the labor supply. But this will require expanded access to broadband connectivity and affordable, technology-enabled education, as well as more career-advancement opportunities. One proposal that deserves consideration is to use tax credits and other incentives to attract entrepreneurs and businesses to rural areas.

But increasing the LFPR will take the US only so far. President Donald Trump might not like it, but America will need more legal immigration. The crucial role that immigrants will play in future US growth cannot be overstated. In the 2017-2018 fiscal year, 10% of the US counties that experienced population growth did so because of immigration.

Another requirement for meeting future labor-market demands is reskilling. As automation becomes an increasingly important component of economic growth, workers employed in routine manual and cognitive jobs will become more vulnerable to displacement. New social-insurance programs will be needed to help them acquire new skills, and existing benefits should be made portable to follow workers from job to job. A good model is Singapore’s SkillsFuture program, which gives every citizen access to individualized reskilling programs, and increases tax credits and other benefits as workers age.

In the US, policymakers at all levels can help workers and businesses alike by providing tax credits for investments in employee training, expanding apprenticeships, and supporting innovative career-advancement and training programs. Current and future workers must be equipped to gain the credentials and work experience they need in a rapidly changing occupational environment.

In California, for example, Governor Gavin Newsom (whom Lenny Mendonca advises) is developing a comprehensive strategy to upskill the state’s diverse workforce. The administration envisions a cradle-to-career education system that will offer two years of free community college and 500,000 “learn and earn” apprenticeships by 2029. Newsom also intends to convene a new commission on the future of work, through which government, labor, and business leaders will consider solutions to the labor-supply challenges discussed above.

The issue is not just “the future of work,” but the future of people and their livelihoods. Developing the skills needed for the twenty-first-century labor market is the most effective way to foster growth, address inequities, and generate measurable prosperity for all.

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