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Trump, Sanders Miss the Point on US Workforce

Feb. 23, 2016
A force holding back the economy that politicians overlook is the fact that the U.S. labor force is shrinking.

To hear Donald Trump tell it, the biggest problems with the U.S. economy can be stopped at the border, where immigrants and cheap foreign goods threaten American livelihoods. Or to hear Bernie Sanders tell it, the source of the middle-class's affliction is a powerful Wall Street and K Street oligarchy.

Actually, the forces holding back the economy are internal and structural, the result of historical trends more than venality (I’m talking to you, Bernie), or stupidity (you too, Donald). So they require different solutions from the ones the candidates are pushing.

QuickTake Discouraged Workers

Perhaps the biggest challenge is that the U.S. labor force is shrinking. Of the richest 38 nations, only the U.S. and two others (Denmark and Norway) have seen declining rates of labor-force participation, which counts the employed and those looking for work.

The unemployment rate has plummeted to 4.9% from 10 percent in 2009, but that's largely because people are abandoning the workforce. In 2015, the participation rate fell to its lowest point in almost 40 years. It ticked up in the last few months, but by a barely perceptible amount.

It isn't just older workers who are leaving the scene, either. Younger workers (ages 15 to 24) and prime-age workers (ages 25 to 54) are walking away from the job market. The trend is most pronounced for prime-age men, whose participation rate plummeted almost 6 percentage points, to 88%, from 1975 to 2013--far more than in other well-developed countries.

Even women are leaving the job market while in their prime. The U.S. used to have one of the developed world's highest female labor-force participation rates. Now it has one of the lowest. 

It's an economic fact of life that improved living standards require economic growth, and one way to achieve that is to have more people producing more goods and services. One solution to address slower growth is to admit more immigrants, especially those with advanced degrees to bolster the tech-talent pool and those with ambitions to start a business. Though Trump and Sanders say these people are taking away good jobs from Americans, the country can't create good jobs unless it has the economic vitality these newcomers help deliver.

The only other way to raise living standards is for those with jobs to increase their output. And that brings us to troubling trend No. 2: Productivity, which measures employee output per hour of work, is also declining. When productivity slumps, bad things usually follow, including lower corporate earnings, stagnant wages, declining stock prices and layoffs.

Northwestern University economist Robert Gordon, in his new book, "The Rise and Fall of American Growth," points out that the retirement of the Baby Boom generation is causing a decline in hours worked per person, and this is likely to continue for 25 years, "bringing labor productivity to center stage in any discussion of the future of growth in American well-being."

And yet, aside from an awkward attempt by Jeb Bush early in the campaign to draw attention to the issue, the productivity slowdown is missing entirely from the 2016 election.

Economists theorize that the drop in productivity stems from a decline in so-called business dynamism, which measures the rate at which companies enter and exit the economy. That leads to a third troubling trend: The U.S. is losing its entrepreneurial zeal. Uber, Airbnb and other Silicon Valley unicorns notwithstanding, the rate of new-company formation in the U.S. is about half what it was in the 1980s.

Because young, high-growth companies are responsible for 50% of new jobs, the lost generation of startups has resulted in a corresponding jobs deficit, slower wage growth "and a sense of pessimism about the American economic future," writes Dane Stangler, the Kauffman Foundation's head of research.

Every presidential candidate, even Sanders, pays homage to entrepreneurs. But as New York Times columnist Thomas Friedman argued last week:

I never hear Sanders talk about where employees come from. They come from employers--risk-takers, people ready to take a second mortgage to start a business. If you want more employees, you need more employers. 

As for Trump, instead of encouraging entrepreneurs with policies that would help them, his only solution is to call for fewer regulations on business. 

He trashes government for what it provides now--small-business loans, grants, training programs and export assistance--but fails to specify what government can do right.

To Trump and Sanders, the economic and political systems are rigged in favor of the powerful. But in failing to address the real megatrends affecting the U.S. economy, they are pulling wool over the eyes of their supporters. And maybe their voters prefer it that way.

--Paula Dwyer

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