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Participation in labor force—not productivity—more likely to drive growth, researchers say
The slowly growing U.S. economy could soon get a boost from an unlikely source: low-skilled workers without college educations, new research suggests.
While the conventional wisdom may be that workers with lower skills are a drag on the economy, Harvard University economics professor Dale Jorgenson said their absence from the labor force since the Great Recession has actually been holding back economic growth. But now they are returning, according to government data, and Jorgenson said they will fill a void, helping the economy grow at a faster clip over the next decade.
"There are a lot of people still on the sidelines, especially people less well-educated and relatively young," Jorgenson said. "They are gradually being drawn back into the labor force."
Paper Parses Workforce by Education, Age, Gender
Jorgenson co-wrote a working paper on the subject with researcher Mun Ho of Washington, D.C.-based think tank Resources for the Future and Jon D. Samuels, a research economist at the Bureau of Economic Analysis. It was published in July by the National Bureau of Economic Research and examines the drivers of U.S. economic growth from 1947 through 2014. The paper is titled "Education, Participation and the Revival of U.S. Economic Growth."
Crunching the data in ways that Jorgenson said had never been done before, the economists were able to parse the labor force by education, age and gender and then examine the connection between labor and capital investment in fine detail. They found that productivity, often assumed to be a major factor in growing the economy, has actually accounted for only about 20 percent of economic growth since the end of World War II. A much larger share—80 percent—came from investment in capital and equipment and from a growing labor force.
The dot-com boom of the late 1990s spurred growth throughout the entire economy, bringing young people without college degrees into the labor force in unprecedented numbers as opportunities became available even outside the technology sector (drivers and warehouse workers fulfilling online orders, for example). But many of these workers were laid off during the recession of the early 2000s, and labor force participation rates of that group dropped even more sharply after the Great Recession.
For example, nearly 90 percent of men ages 25-34 without college degrees were in the labor force at the peak of the dot-com boom, but that number fell to less than 75 percent by 2010. For women in the same age and education categories, the participation rate went from about 70 percent to 55 percent.
Those trends have started to reverse themselves during the past few years. Now, nearly 80 percent of young men without college degrees are in the workforce, and 60 percent of women are. But there is still plenty of room for more growth, even if the numbers don't return to their pre-recession highs.
Less-Educated Workers Will Be in Demand
As the economy grows and the service sector expands further, Jorgenson said, workers with less education will once again be in higher demand. While the quality of the labor force, as measured by years of education, will level off, the number of hours worked will likely climb over the next decade, boosting economic growth to an average of just under 2.5 percent a year, the paper asserts.
And more people working means total wages earned increases. As those dollars get recycled back into the economy, everybody benefits.
An even rosier scenario envisioned in Jorgenson's paper suggests that growth could top 3 percent per year, a level of expansion the U.S. economy has not seen since before the Great Recession.
Laura Kerekes, chief knowledge officer at ThinkHR, a human resources consulting and training firm based in Pleasanton, Calif., says she is seeing firsthand the forces that Jorgenson described in his paper. A shortage of skilled workers is leading employers to hire less-skilled workers and then train them up for the job, she said. Those workers, in turn, play an important role in helping American businesses and growing the economy.
"Lower-skilled workers may be willing to work in positions requiring flexible scheduling, such as variable hours, part-time or temporary work," she said. "That helps businesses control labor costs while being available more hours to meet their customers' needs."
Jorgenson's research suggests that the spread of information technology—which has not peaked—is likely to play a key role by helping to buffer the decline in the workforce's average education level that will occur when lower-skilled workers enter, or re-enter, the labor force.
"Capital investment makes people more productive, and that kind of investment makes people really more productive," he said. Every dollar invested in information technology, he said, improves productivity seven times as much as a dollar invested in other forms of capital, such as land or equipment.
Larry Boyer, president of Washington, D.C.-based Success Rockets LLC, an executive leadership consultancy, and an economist who specializes in workforce issues, said employers should determine how best to use technology to make their workers more productive.
"How can you get these people that don't have high levels of education or are not used to this type of training to learn these types of skills?" Boyer asked. "From an employer's standpoint, you want to be looking ahead to see how these technologies are going to be impacting you and your workforce two or three years down the road, because it's going to take a while to move people there."
Daniel Weintraub is a freelance writer based in Sacramento, Calif.
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