Over the last decades, the US labor market has always dealt efficiently with structural changes, reacting to the development of demand and supply patterns. Nowadays, two of the most important considerations to make regard demographic transition and the faster and faster development of technology, which is reaching its current peak with artificial intelligence. The focus of our analysis will be on the performance of the US labor market, as well as on its past, present, and future reaction to the phenomena that influence it.
What got us here?
The history of labor markets focuses on identifying the forces that have influenced the allocation of labor in the economy at different moments in time, responding to shifting stimuli and macroeconomic developments.
During last century, and focusing on the post-war period, the US labor market has gone through a steep process of reallocation of labor, both in terms of which sector contributes the most to the US GDP growth and in terms of evolution of the labor force itself. Indeed, the subject of the analysis of the labor market is certainly the labor force: the number of people either working or looking for a job. It is a dynamic concept, whose growth and well-being affect the whole economic scenario of a country, reflecting the influence of social, political, historical and demographic transitions. The rise of growth rates of the population and an increasing participation have shaped the US labor force over the last 70 years, drastically changing its size and composition. When analyzing this phenomenon, the major factors to identify are demographic patterns and an increasing level of diversity of the labor force. In particular, diversity may be considered as a set of broad phenomena which have profoundly altered the US economy: rise in women participation, free immigration both within the US and from abroad, and, finally, overall level of inequality of salary. This last concept has roots in race and gender discrimination, as well as in differences between skilled and unskilled workers.
Demographic patterns concerning the US labor market over the last century may be linked both to a change in birth and death rates and to immigration mechanisms. (Starting from the Industrial Revolution, life expectancy for the average individual has progressively increased due to improvements in healthcare, medical knowledge and hygienic conditions. While for births there have been alternating moments of rise and decline, respectively baby boom and baby bust, the death rate has declined continuously and consistently. This scenario of increasing life expectancy has occurred during a period characterized also by an intense free migration to the US.) Immigration from Europe is one of the dominant themes of American history. This process of “European settlement” may be considered as a labor market mechanism. Indeed, the US labor market was characterized by scarcity of labor with respect to lands and natural resources (high land to labor ratio). The consequence was a situation of high labor productivity, which in turn raised wages and determined higher standards of living in the US than in Europe. Until the Industrial Revolution, however, the potential benefits of migration to America were counterbalanced by high transportation costs and low integration between countries. It was only after the 18th century, when technological progress made travelling accessible to everyone, that the number of immigrants to the US, both within US states from the East to the West, and from abroad, increased sharply.
The economic impact of immigration to the labor market is theoretically ambiguous. Indeed, while an increase in labor supply should determine a fall in wages, the rise in population caused by immigrants may boosts the demand for goods and services, which in turn could rise the demand for labor, resulting in higher wages. Whatever the theoretical impact, immigration began to be a highly controversial political issue, leading to the so called “immigration barriers” and “selective migration” patterns, where people from abroad where either discarded or welcomed in the US labor market basing on their ethnicity or level of skills.
Besides all the above-stated trends that have influenced the US labor market, one more should be mentioned: technology. It is certainly one of the most fundamental, although particularly complex, factor to understand the behavior and development of the labor market. Since its early phase during the Industrial Revolution, technological change has always produced considerable concerns regarding its effects on unemployment. Why should new technological tools be implemented if they may cause hundreds, if not millions, of people to lose their jobs? Not only technological development has been essential and has been fostering the whole economic one, but also the above-mentioned worries have proven to be historically unfounded.
The main innovation brought by technology was an incredible boost to productivity, which has two main economic consequences. Keeping everything else equal, industries with significant increases in efficiency experience declining levels of employment, given that a smaller number of workers is needed to produce the same amount of goods. However, in reality, everything else does not stay the same: technological improvements cut labor costs per unit of output, resulting in a sharp decrease in total costs. In turn, this leads to a fall in prices and, consequently, a rise in consumption of the industry’s output. Therefore, inside a specific industry where technology is introduced, the resulting decline in labor demand may be offset by the consequent increase in the demand for output.
Empirical evidence for the US in the post-war period shows that this has been the case. Although technological change certainly modified the distribution of employment among industries and job-positions, there are no proofs of a historical correlation between technological enhancements and unemployment in the United States. However, this does not exclude the possibility of such a connection in the future, given the new and always increasing number of technological devices invented and adopted in almost all the economic sectors.
What’s happening in the US labor market today
After its turbulent history, now the US labor market is at its strongest in 50 years. As the unemployment rate decreased from already low levels of 3.7% in November 2022 to 3.3% in March 2023 it currently stands below pre-pandemic levels. To understand the current situation and its implications for the economy it is vital to understand how we got here.
During the COVID-19 pandemic many US businesses struggled which resulted in an increase in unemployment up to 14.7% in April 2020. However, the reopening of the economy led to a rebound in demand and the economy quickly picked up again. The rebound was strong as people were eager to consume again after restrictions were lifted. In addition, potential savings during the pandemic lead to more available money for households. This was especially supported by the high fiscal stimuli by the US government during the pandemic. Much of the money injected in the economy to prevent a strong recession led also to increased demand after the pandemic was over. These delayed effects of fiscal policies are often observed as laws need time to be passed and implemented and are also visible in the economic data. In fact, after the real GDP shrank by 2.8% in 2020, in 2021 and 2022 it grew by 5.9% and 2.1% respectively. The rising demand led businesses to hire more employees and resulted in an increased labor demand. Especially, the industry of leisure and hospitality picked up a lot in the recovery after the pandemic, however, it has not reached pre pandemic levels yet.
In contrast to the increased demand, the data suggests that after the corona pandemic, the supply of labor decreased substantially. This can generally be associated with two effects. On the one hand, we must consider the number of people in work. Referring to data from the National Bureau of Economic Research, the participation rate in the US decreased by a great extend in the beginning of the pandemic and even though it recovered over the last two years it still stands below the pre-pandemic level. On the other hand, people who are working tend to decrease their hours worked after the COVID-19 pandemic. This is most likely due to the demand of the employees for an improved work-life balance which stems from experiences during the pandemic. Both effects add up and led to a decrease of 33 hours worked per year per capita, that is total hours worked during one year divided by the size of the population, from 2019 to 2022.
So, in general, we see an increased demand for labor meeting a decreased supply. The imbalance between the two results in a higher bargaining power for employees. In addition, with a shortage of especially skilled workers, wages across branches rose and in turn led to higher costs for firms. The combination of higher costs for firms and excess demand after the pandemic put upwards pressure on prices. To make matters worse, the conflict in the Ukraine added further to an increase in inflation. In fact, in 2021 and 2022 the annual inflation stood at 7% and 6.5% respectively. As targeted inflation is approximately 2% the FED continuously increased interest rates to slow down the economy since March 2022. The interest rate now stands at 5%. As inflation seems to slow down, first signs of the tightening monetary policy are observable. However, annual inflation remains high with 6% in February 2023 and further monetary tightening seems likely. The increased interest rates fuel the fear of a recession as lending and therefore investing gets more expensive. In addition, the recent struggles in the banking sector further increased uncertainty of the future and might influence firms’ decision making. For all those factors it is therefore hard to predict how the labor market is going to develop in the coming months and years.
How is demographics changing the labor market
The United States has undergone significant demographic changes over the past few decades.
As the percentage of white Americans is declining and other ethnicities are rising, the country’s population is becoming more diverse. According to the US Census Bureau, white Americans decreased steadily over the years dropping from 76.5% in 1990 to 57.8% by 2020. In contrast, the proportion of people of color has been increasing, with Hispanic and Latino Americans, Black Americans, and Asian Americans being the fastest-growing groups.
Moreover, the US population is aging. The baby boomer generation, born between 1946 and 1964, is reaching retirement age and this trend is expected to continue in the coming years, with the number of people aged 65+ projected to double by 2060. This also implies a projected future rise in the need for pharmaceuticals and higher demand for care homes. As years go by, there will always be fewer people that can work and more people to maintain. Governments will face higher costs to deal with the elderly population with investments in medicine and health care which will inevitably have to rise significantly.
With more people reaching retirement age and many retiring early due to the Covid-19 pandemic, we will experience a significant decline in the working population in the coming years, yielding an ever-tighter labor market.
The changing demographics in the US have had a significant impact on the job market, affecting everything from employment opportunities to wages and benefits. One of the most significant effects is that the labor force is becoming more diverse. This means that employers need to be more inclusive and flexible in their hiring practices to attract and retain a diverse workforce and those who fail to do so risk losing talented workers to their competitors.
Moreover, as the baby boomer generation retires, there is a skills gap in the workforce. Many of these employees have valuable skills and knowledge that are difficult to replace, and employers will increasingly struggle to find workers with the right skills and experience to fill these positions. This has increased demand for workers in the more skilled industries such as technology and healthcare which are experiencing rapid growth.
Wages and benefits have also been impacted by the changing demographics in the US as workers from diverse backgrounds often face discrimination and pay disparities. However, as the labor force becomes more diverse, employers are under pressure to address these issues. This has led to an increase in the minimum wage in some states and cities and the introduction of policies aimed at improving diversity and inclusion in the workplace.
The changing demographics in the US are expected to continue in the coming years. The proportion of people of color is projected to increase, while the proportion of white Americans is expected to decrease further. This trend is likely to lead to an even more diverse and inclusive workforce and society.
However, the aging population is also a cause for concern. As the baby boomer generation retires, there will be a significant gap in the workforce, particularly in industries that require specialized skills and knowledge. This could lead to labor shortages and increased competition for workers, leading to higher wages and benefits. Inevitably, the working age will have to rise to allow employers to have more time to train inexperienced workers and to cope with the increasing share of elderly that must be maintained by both governments and younger workers. Employers struggling with finding skilled and knowledgeable individuals will seek other ways of filling workforce gaps without having to keep up with higher wages. Although with some drawbacks, the rise of Artificial Intelligence and Machine Learning comes at a perfect moment and could be an extremely valid replacement.
Moreover, the COVID-19 pandemic has had a significant impact on the job market with many people losing their jobs and many getting used to the “work from home” setup which is becoming an increasingly common feature also in the post-pandemic period. The pandemic accelerated changes that were already happening, such as the shift towards remote work and the adoption of technology in the workplace. “Smart working” (remote work) makes workers more flexible and is actually beneficial for firms although efficiency and productivity might suffer.
The future outlook for the job market in the US is uncertain, but it is clear that employers and workers will need to adapt to the changing landscape to succeed.
Is AI going to make things worse?
The implementation of AI in the workplace has significant implications for the labor market.
On the one hand, AI can lead to job displacement, as machines and software can perform tasks previously done by humans, such as data entry, customer service, and even some professional services, such as legal research and accounting. According to a report by McKinsey Global Institute, up to 375 million workers worldwide may need to switch occupational categories and learn new skills by 2030 due to automation.
On the other hand, AI can also create new job opportunities in fields such as data science, software engineering, and AI research. AI can also augment human decision-making, by providing insights, recommendations, and predictions, which can improve the quality and speed of decision-making. AI can also create new products and services, which can lead to the creation of new businesses and industries.
The implementation of AI in the workplace is also changing macroeconomic trends, such as productivity, economic growth, and income distribution. On the one hand, AI can increase productivity by automating routine tasks, reducing errors, and improving efficiency. According to a report by the Brookings Institution, AI adoption could increase labor productivity growth by 1.3 to 1.9 percentage points annually.
On the other hand, AI can also lead to economic disruption, as it can lead to job displacement, income inequality, and social unrest. According to a report by the World Economic Forum, AI could displace 85 million jobs worldwide by 2025, while creating 97 million new jobs. However, the new jobs may require different skills and may not be accessible to the workers who lost their jobs due to automation.
Many companies are already implementing AI in their operations, and some are leading the way in AI innovation and adoption. Companies such as Amazon, Google, Microsoft, and IBM are investing heavily in AI research and development and are using AI to improve their products and services. For example, Amazon is using AI-powered robots in its warehouses to automate order fulfillment, while Google is using AI to improve its search engine and language translation.
However, AI adoption is not limited to tech giants. Many companies in various industries are using AI to improve their operations and create new products and services. For example, Procter & Gamble is using AI to improve its supply chain management, while JP Morgan Chase is using AI to detect fraud and improve customer service.
The future of work in the United States is rapidly changing, and AI is playing a major role in that transformation. AI is reshaping the way we work and interact with our jobs, and has significant implications for the labor market, macroeconomic trends, and society. While AI adoption can lead to job displacement and economic disruption, it can also create new opportunities and open up new industries. Therefore, it is important for workers, businesses, and governments to prepare for the future of work with AI, by upskilling and reskilling, promoting innovation and ethical AI, and developing policies and regulations that promote job creation and social welfare.
Is AI going to make things worse?
The implementation of AI in the workplace has significant implications for the labor market.
On the one hand, AI can lead to job displacement, as machines and software can perform tasks previously done by humans, such as data entry, customer service, and even some professional services, such as legal research and accounting. According to a report by McKinsey Global Institute, up to 375 million workers worldwide may need to switch occupational categories and learn new skills by 2030 due to automation.
On the other hand, AI can also create new job opportunities in fields such as data science, software engineering, and AI research. AI can also augment human decision-making, by providing insights, recommendations, and predictions, which can improve the quality and speed of decision-making. AI can also create new products and services, which can lead to the creation of new businesses and industries.
The implementation of AI in the workplace is also changing macroeconomic trends, such as productivity, economic growth, and income distribution. On the one hand, AI can increase productivity by automating routine tasks, reducing errors, and improving efficiency. According to a report by the Brookings Institution, AI adoption could increase labor productivity growth by 1.3 to 1.9 percentage points annually.
On the other hand, AI can also lead to economic disruption, as it can lead to job displacement, income inequality, and social unrest. According to a report by the World Economic Forum, AI could displace 85 million jobs worldwide by 2025, while creating 97 million new jobs. However, the new jobs may require different skills and may not be accessible to the workers who lost their jobs due to automation.
Many companies are already implementing AI in their operations, and some are leading the way in AI innovation and adoption. Companies such as Amazon, Google, Microsoft, and IBM are investing heavily in AI research and development and are using AI to improve their products and services. For example, Amazon is using AI-powered robots in its warehouses to automate order fulfillment, while Google is using AI to improve its search engine and language translation.
However, AI adoption is not limited to tech giants. Many companies in various industries are using AI to improve their operations and create new products and services. For example, Procter & Gamble is using AI to improve its supply chain management, while JP Morgan Chase is using AI to detect fraud and improve customer service.
The future of work in the United States is rapidly changing, and AI is playing a major role in that transformation. AI is reshaping the way we work and interact with our jobs, and has significant implications for the labor market, macroeconomic trends, and society. While AI adoption can lead to job displacement and economic disruption, it can also create new opportunities and open up new industries. Therefore, it is important for workers, businesses, and governments to prepare for the future of work with AI, by upskilling and reskilling, promoting innovation and ethical AI, and developing policies and regulations that promote job creation and social welfare.
By Chiara Evangelisti, Amos Appendino, Leo Antlitz, Pietro Golzio
SOURCES
- The Economist
- Financial Times
- Picet Wealth Management
- McKinsey
- CNBC
- U.S. Bureau of Labor Statistics
- Harvard Business Review
- World Economic Forum