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A Shrinking Labor Force Isn’t Entirely Bad News

Tight labor markets can be hard on corporations. But they can help marginal workers find jobs.

The recent strike by autoworkers is one signal of a changing labor market that gives more leverage to employees to demand better pay and working conditions.
(Sarah Rice/Getty Images/TNS)
The post-pandemic world has seen consistent talk of labor shortages and an emerging belief that America may be entering into a phase of tight labor markets, with many unfilled jobs and limited opportunities for worker advancement. One driver is demographic. Birth rates have fallen significantly and population growth has slowed. Three quarters of U.S. counties saw more deaths than births last year. The Census Bureau now envisions future scenarios in which the U.S. population is declining by the end of the century.

In my state of Indiana, economists are predicting the total labor force will be flat through 2045. Economist David Autor has been quoted as saying that “things point in the direction of prolonged labor scarcity.”

A flat to declining labor force will have a profound impact on the country. While we can’t predict the future, we can speculate about some of the possibilities.

The first is that for most places, we are nearing the end of job growth. If states like Indiana or Vermont can’t grow their labor force, they won’t be adding many, if any, net new jobs. It’s impossible to create jobs if there aren’t workers to do them. This should augur for a focus on quality over quantity. What are the best jobs communities can attract for their workers? And how can they upskill their citizens in order to get even better ones?

A positive impact may be greater investment in search of increased productivity. By some measures, America has been becoming less productive. There’s been a need to boost national productivity for some time. But if there’s an ample supply of cheap labor, why invest in trying to do that? Now that supply may not exist.

So structural labor tightness could force firms to invest in new technology and processes to raise productivity. We’ve all likely seen firms trying to do this at fast-food restaurants, with the push to get people to order via cellphone apps or at kiosks. But it could happen in many other domains. Singapore has done this successfully in manufacturing, for example, using technology to keep its industrial output up despite being a very high-cost country.

Other effects could be beneficial for workers, particularly those who might normally encounter difficulties finding employment, such as ex-offenders. Pre-pandemic, there was much talk of firms hiring ex-offenders because they were desperate for labor. I hope we see much more of this. It’s incredibly important for people who’ve served their time to be able to find a job and become productive and responsible members of society.

A tight labor market encourages businesses to give these people a chance when they might previously have been overlooked. The same might be true of workers with disabilities, or those who have experienced other life challenges interfering with their ability to get hired.

A labor shortage also gives more leverage to employees to demand better pay and working conditions. Companies have been trying to get workers to come back to the office, for example, but thus far many of them have been able to stave that off, keeping to a hybrid schedule of only a few days per week in the office. There have been viral videos of Gen Z workers talking about how much they hate their 9-to-5 job because it doesn’t leave them free time. Young workers today put a huge value on schedule flexibility.

Some manufacturing firms appear to be struggling to hire people because younger employees prefer to drive for Uber or take other gig-economy jobs that give them control over their schedule. Employers may have no choice but to play ball with these kinds of employee demands in the future, or find themselves struggling to attract the talent they need.

The ability of corporations to dictate terms of development incentives to states and localities may also decline. I don’t expect these incentives to go away anytime soon. But the ability of corporations to threaten a move out of state over social policy legislation will be reduced. Companies will have to go where the labor force is. If a state has workers available, firms will need to take advantage of that. We are already seeing this in Texas, Florida and several other states.

Exactly how things will play out remains to be seen. But if the era of steady labor force expansion does come to an end, it will force many American firms and communities to go through a significant period of adjustment, away from the American booster tradition of simply focusing on growth, growth, growth.

Governing’s opinion columns reflect the views of their authors and not necessarily those of Governing’s editors or management.
An urban analyst, consultant and writer. He can be reached at or on Twitter at @aaron_renn.
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