NCPA - National Center for Policy Analysis

Considering Labor Quality

January 17, 2002

Quality of labor is an important factor in productivity growth. According to a new study by Daniel Aaronson and Daniel G. Sullivan at the Federal Reserve Bank of Chicago, labor-quality patterns were influenced by the huge baby-boom generation. Aaronson and Sullivan used wages as an indicator of labor quality, assuming that in a competitive job market, people are paid what they're worth.

  • During the late 1970s and early 1980s, labor quality began to rise as better educated, but inexperienced, boomers entered the workforce.
  • As they gained experience, labor-quality growth accelerated to an average of 0.6 percent between 1987 and 1994.
  • From 1995 to 2000, quality rose more slowly -- and the authors predict it will slow even more this decade.
  • By 2010, as boomers move beyond their most productive years and they are replaced by a significantly smaller next generation, labor-quality growth will take a big hit.

Overall, the researchers forecast labor-quality growth will drop to less than 0.1 percent by 2010.

That means productivity and output could grow up to 0.2 percentage points a year more slowly than growth would have been if labor quality had continued to improve at its 1990s pace.

Source: James Mehring, "Economic Trends: Boomers: A Hard Act to Follow," Business Week, January 21, 2002.

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