March 22, 2011
Each year CBO examines many developments that could have short- or longer-term consequences for the budget and the economy. During the decades to come, one such development is expected to be a slower rate of growth of the labor force relative to the average growth rate of the past few decades. That slowdown is anticipated to occur primarily because of the aging and retirement of large numbers of baby boomers and because women’s participation in the labor force has leveled off since the late 1990s after having risen substantially throughout the three decades before that. A background paper released today describes the methods CBO uses to project such trends through 2021.
The labor force has increased by about 0.8 percent per year, on average, over the past decade. That rate of growth is less than the annual rate of 1.2 percent in the 1990s and much lower than the 2.1 percent rate exhibited over the three decades before that (see figure below). Although the U.S. population has grown by about 1.1 percent per year over the past 10 years, the labor force participation rate (the percentage of the civilian noninstitutional population age 16 years or older who are either working or actively seeking work) has declined, reversing a long-term upward trend.
Long-Run Growth in the Labor Force (Percentage Change from Ten Years Earlier at an Annual Rate)
CBO anticipates that during the next decade the U.S. labor force will grow at about the same rate, on average, as it did during the past decade. The labor force is projected to increase from 153.9 million people in 2010 to 168.7 million in 2021. The aggregate rate of participation in the labor force is projected to fall from 64.7 percent in 2010 to 63.0 percent in 2021.
CBO’s projections combine analysis of demographic and labor market trends:
- Population projections. CBO develops projections for specific groups in the adult civilian noninstitutional population, categorized by age and sex, by applying growth rates developed by the Social Security Administration (SSA) to population estimates for 2010. Those projections are adjusted for differences between CBO’s projections for net immigration and those incorporated in SSA’s population projections. On that basis, CBO estimates that the civilian noninstitutional population age 16 or older will reach 267.6 million in 2021, up from 237.8 million in 2010.
- Labor force projections. CBO projects the overall participation rate by combining its projections for various demographic groups weighted by their share of the population. That rate is adjusted to account for the effects of changes in marginal tax rates that are scheduled under current law and is then applied to population projections to estimate the potential size of the labor force if the economy were at full employment. Further adjustments for the effects of short-run economic fluctuations (or business cycles) are made to project the actual participation rate and the size of the labor force. CBO projects that the labor force will grow by about 15 million people (or about 10 percent) over the next decade. Because of a decline in the rate of labor force participation, however, growth in the labor force is expected to be less than the increase in the population, which is expected to grow by 12½ percent during the next 10 years.
Two factors are especially important to the current projections of participation in the labor force. The first is near-term economic conditions. Because of the weakened state of the economy, the labor force is currently well below its potential size; consequently, CBO expects it to grow faster than its long-term trend between now and 2016. By that time, CBO projects, the output gap will have closed (that is, the economy will be operating at its full potential), and the actual labor force will be about equal to the potential labor force. After 2016, CBO expects the growth of the labor force to equal, on average, the growth of the potential labor force, and it does not attempt to forecast the timing of subsequent business cycles. The second factor is the impending retirement of the baby-boom generation (people who were born between 1946 and 1964), which will cause the potential labor force participation rate to decline throughout the next decade. In CBO’s estimates, the effect of the second factor outweighs the first, pushing down the labor force participation rate, on balance, over the next decade.
This background paper was prepared by David Brauer of CBO’s Macroeconomic Analysis Division.