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Will Technology Lead to a US Labor Shortage?


For the past few years we've been worrying about technology reducing the need for workers, when it's actually reducing the desire to work.

"Clearly, sustained low inflation implies less uncertainty about the future, and lower risk premiums imply higher prices of stocks and other earning assets."

Whaa? Who said that? Why, none other than Alan Greenspan two lines before his infamous "irrational exuberance" quote. Today we see low inflation and low interest rates as signs of deflationary pressures and high economic uncertainty, but 15 years ago the Chairman of the Federal Reserve saw them as signs of less uncertainty warranting higher risk asset prices. Social mood warps our interpretation of economic conditions.

Which brings us to the labor force participation rate, that bogeyman clearly manipulated by the government to produce artificially low unemployment figures. As we see in the chart below, the labor force participation rate has fallen meaningfully since the last recession, but it had been falling in the years before that as well, with its peak in the late '90s.

However, this doesn't tell the whole story. The participation rate for men has been in secular decline for five decades running now.

For women, the participation rate increased for decades, but they too peaked out in the late '90s and have been falling ever since.

Perhaps most startling of all, the participation rate for 16-19-year-olds peaked in the late 1970s, has fallen ever since, and is now at levels never seen before in US history.

What's going on? Consider this chart from a study commissioned by Zipcar (ZIP).

Americans, especially young Americans, are increasingly finding things they want to do other than driving places. And if they don't need to drive, they don't need to buy a car. And this doesn't just apply to cars – as the cost of consumer electronics continues to fall, and thanks to services like Netflix (NFLX), Spotify, and social media, it's never been cheaper to afford leisure that satisfies many people.

After my junior year of high school in the summer of 1998 I wanted my own computer. I figured that it would cost me around $2,000 in 1998 dollars to purchase. I worked around 30 hours a week that summer at $5.35 an hour to buy that computer. And that was to buy a fairly slow Windows desktop with dial-up Internet -- no Google (GOOG), no Facebook; just AOL Instant Messenger, Starcraft, and a handful of MP3s. Today I'd probably ask for an iPad (AAPL) for Christmas and use it to blog, tweet, learn how to program, or connect with volunteering or social opportunities. No wonder 16-19-year-olds aren't working.

Something nobody has pointed out when thinking about the labor force participation rate is that the value of leisure time has soared over the past several years. Thanks to the continued growth and evolution of the Internet we have so many more ways of spending our time, whether it's consuming media, connecting with people via social networking, producing our own content, or learning about new interests. As our values have shifted from materialism to intangibles we value our relationships more, which for some has meant quitting jobs to take care of elderly relatives or young children. Some people, young and old, have decided to invest more in their education, removing themselves from the workforce temporarily. Others, thanks to an aging society and health-care advances, are living longer in retirement. All of these factors reduce the size of the labor force, and they are all welcome developments.

Pessimists have pointed out that "due to the recession" the employment to population ratio is back to levels of 30 years ago. But is that necessarily a bad thing?

Note that in the early 1960s, the golden age of America, it was three full percentage points lower than it is today. At the time confidence in America, its institutions, and its government was at a high. Nobody was saying there weren't enough jobs or prosperity to go around.

Maybe that's where we're headed, not because people abandon the labor force out of despair, but because they find more fulfilling ways of spending their time. As employer demand for labor returns, Baby boomers continue to retire, and if teenagers decide they've got better ways of spending their time, we could have a different sort of labor crisis – not enough workers – if a meaningful portion of those age 21-65 find alternatives to being part of the workforce due to the opportunities arising thanks to technological and communication advances.

For the past few years we've been worrying about technology reducing the need for workers, when technology is actually reducing the desire to work -- at least in the way we're used to thinking about it.

Twitter: @conorsen
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