The cost of goods is rising and rising—6.1% last year, according to government numbers released on Friday, Feb 25—and lots of ink has been spilled explaining why. Consumers have more money in their pockets thanks to wage gains and increased savings during lockdowns, so demand for goods is up, but production slowed during the pandemic. Supply chain snafus have made it more expensive to get things from one place to another, so companies are raising prices. Energy prices have been rising, and the war in Ukraine will only drive them higher.
But the simplest explanation may be this: because of long-term demographic shifts, the U.S., like many other countries, simply doesn’t have enough workers to make and move all the things that people want to buy anymore. Too many older people have dropped out of the workforce, never to return, and too few young people and immigrants are coming to replace them. There are 11 million job openings in the U.S. economy right now, yet there are only 6.5 million people who are unemployed.
“All of our gaps in the supply chain are because people aren’t there to make the goods. This is the problem. It’s a lack of labor,“ says Ron Hetrick, senior economist at Emsi Burning Glass, a global labor market data and analytics company that put out a report on Feb. 22, The Demographic Drought: Bridging the Gap in Our Labor Force. More than half of the 5 million people who dropped out of the labor force since early 2020 are 55 or older, Hetrick calculates. (The Census Bureau suggests that early retirements account for 3.4 million people.)
The demographic shift is driving prices up in industries including transportation, manufacturing, and construction, to name a few. Consumer packaged goods company Post Holdings, Inc., which owns brands like Raisin Bran, said in an earnings call on Feb. 4 that internal and external labor shortages had driven up the cost of its products last quarter. United Airlines said in January that because of a pilot shortage, it was cutting services to around 20 U.S. communities—like many airlines, United saw retirements accelerate during the pandemic. And Albertsons, the grocery chain, said in a January earnings call that because of labor shortages, it was paying workers more overtime, which led to some price increases.
The worrying part of demographic-driven inflation is that it’s not going away anytime soon. Last year, the U.S. population grew at 0.1%, its slowest rate since the nation’s founding, according to Census Data. And still the population continues to age as the fertility rate declines. By 2034, older adults will outnumber children for the first time in U.S. history. The share of the population that is under 20 years old has been steadily declining, from 27% in 2007 to 25% in 2020.
Economists also thought that Baby Boomers— born between 1946 and 1964—would stay in the labor market for longer. Boomers drove high labor participation rates in the 1970s and 1980s because so many women joined the workforce. And Boomers were workaholics, Hetrick says, so economists assumed they’d work until they dropped.
But instead, when the pandemic hit, Boomers took stock of their finances and decided to retire. Over the last few years their homes had only gotten more valuable and their stock market portfolios had grown, so they decided to take a step back and not risk contracting COVID-19. The average expected likelihood of working beyond age 62 declined to a new low of 49.3% in November, according to a survey from the Federal Reserve Bank of New York.
This might not have been a problem if workers were coming from other parts of the population to fill the gap. Historically, immigration has helped shore up the labor force when demographic trends lead to worker shortages. But immigration, too, has been falling since 2016. Net international migration in 2021 was just 247,000, the lowest number in at least a decade and about one-quarter of what it was in 2016.
“Falling immigration had already started happening, but it was worsened by COVID,” says Hetrick. “Baby boomers were already starting to retire—but COVID could not have come at a worse time.”
It may be difficult to reverse these numbers, especially because trends of declining birth rates and aging populations aren’t unique to the U.S. Other countries that have typically provided the U.S. with workers, such as Mexico, also have historically low unemployment rates. The economic conditions in other countries that have long driven immigrants to the U.S. may not be as dire as they used to be, as strict immigration policies enacted during the Trump administration have made it harder for people to migrate to the U.S.
Meanwhile, U.S. consumers are still spending as if nothing has changed, and so demand for goods and services is high. American consumers spent $337.2 billion in January, according to the latest data, a 2.1% increase from December.
Consumers in states like Maine, New Hampshire, and Pennsylvania are already seeing the labor issues that come with an aging population. These are states that are already “super-aged,” meaning that 20% of the population is 65 or older, a designation the entire U.S. will reach in 2028. They’re already facing big labor shortages because of retirements and a lack of workers.
“We’ve been trying to recruit for six months, but virtually no one who is applying is qualified,” says Julia Griffin, the town manager of Hanover, N.H., who is trying to hire a senior planner, two building inspectors, staff for after-school programs, and a zoning officer, among other positions. “We have an unusually high number of vacancies,” she says.
Griffin says she knows she’s going to have to increase wages and benefits to attract more applicants, but taypayers will push back on higher costs. Worried that the town won’t have anyone to plow the roads down the line, she started researching autonomous snow plows. (They don’t yet exist.) Some residents are themselves quitting jobs because they can’t find programs—like after-school programs—that the town would have put on in the past, creating a vicious cycle of a shrinking workforce.
This is just the beginning of a demographic shift that’s going to play out in the economy for the next few decades. It has implications for many sectors, including health care, elder care, and housing. Right now, though, consumers may see the most obvious effects of this demographic shift in their pocketbook.
“Every economist I’ve heard who says, ‘inflation is going to last this long or that long,’ I say, ‘Do you have a crystal ball that tells you exactly when these people are going to come back to the labor force?’” Hetrick says. “If we do not get the Boomers back, and immigration does not improve, I’m just telling you the math—I’m not sure how we get back to growth.”
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