While the headline numbers for the labour market are improving, there is an underlying trend that paints a much more ominous picture of the American workforce.
“More educated or experienced workers will likely create more output for each hour they work than less educated or experienced workers,” said JP Morgan economist Michael Feroli. “As the workforce becomes more educated over time we should expect to see this growth in ‘labour quality’ contribute to overall productivity growth.”
In a note to clients on Friday, Feroli noted that the contribution to GDP from labour quality has been significantly deteriorating since 2005.
Between 1980 and 2005, Feroli said, labour quality growth — improvements in the education and experience level of workers — contributed one-third of a percentage point to GDP annually. This year that contribution is projected to drop to nearly 0%, and might stay that way.
While this may not seem like a major fall, Feroli highlights why even a small drop matters.
“In recent years, however, that contribution has fallen to less than 0.1%-pt per year,” he said. “That may not sound like a big deal, but with trend growth already as low as it is every basis point counts.”
There are a few reasons this is happening. Labour quality is a function of experience and education. Feroli noted that experience levels have been damaged by the aftermath of the Great Recession: Marginal workers who were forced into unemployment or out of the labour market entirely may have seen their skills atrophy. Now that they’re coming back to the labour force as the economy improves, their time out of employment lowers the average number of years worked among all workers.
Also, baby boomers have skewed the workforce to be older and more experienced. As they retire and are replaced by younger workers, this structurally shifts overall experience lower. This doesn’t mean millennials are any worse as workers, however.
“Note that we are not making a subjective judgment about the work ethics of Millennials, Baby Boomers, Gen Xers, etc,” wrote Feroli. “Rather, the earlier-mentioned insight of equating of wages with marginal productivity indicates that workers in their 40s and early 50s are, on average, more productive than at other stages of their life cycle.”
On the education side of things, a temporary bump in college enrollment has tapered off. Here’s Feroli (emphasis added):
“Second, after a brief glimmer of hope early in the decade, college enrollment rates have slumped back to the levels that have prevailed since around the mid-1990s. College enrollment rates are well known to be countercyclical: rising during recessions as the opportunity cost of being out of the labour force is at its lowest. With the benefit of hindsight it appears the rise in college enrollment during the recession was simply a cyclical phenomenon, and the formal accumulation of skills appears to be returning to pre-recession levels.
So, a workforce that is getting less experienced on average combined with a shrinking college enrollment rate has resulted in the worst growth rate in the quality of American workers since the late 1970s.