NCPA - National Center for Policy Analysis

The Changing American Workforce

June 13, 2000

Keynesian economists argued that an economy could not have low inflation and a low employment rate. Yet, the U.S. economy has achieved exactly that. A recent study catalogs four factors that have allowed employment growth without inflationary wage increases.

The first factor is that the workforce is proportionately older:

  • Older Americans enjoy greater job security and spend less time on welfare than the young.
  • The average unemployment rate for the 16-24 year old age bracket is 17 percent, compared to the national average of less than 5 percent.
  • The share of the labor force comprised of 16-24 year olds fell from 25 percent in 1975 to 16 percent in 1997.

The second factor is the temporary help industry:

  • The study argues that temporary agencies allow for wage restraint by letting employers pay higher wages to specific, additional workers.
  • Share of payroll employment in this industry rose from 0.5 percent in the early 80's to 2.2 percent in 1998.

The third factor is the rising prison population:

  • Prisons reduce unemployment by removing a characteristically unemployed population from the unemployed statistics.
  • The proportion of adults in jail rose from 0.2 percent in 1970 to 0.9 percent in 1998.

The fourth factor is the decline in union power:

  • Unions tend to increase wage pressures for their members and employers respond with higher wages to encourage employees not to unionize.
  • Union membership has fallen from 25 percent in 1973 to 10 percent in 1998.

The combined decrease in unemployment due to these factors may be as high as 1.1 percent. The study predicts low inflation and unemployment rates will be long lasting since the American workforce will retain the same age proportions for the next decade and the temporary help industries are making lasting structural changes.

Source: "Stagflation in Reverse," Economic Intuition, Winter 2000. Based on: Daron Acemoglu and Robert Shiner, "Efficient Unemployment Insurance," Journal of Political Economy, October 1999.


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