Saturday, November 3, 2007

Two Explainers for the Day

Beyond Those Health Care Numbers by Greg Mankiw

See also comments at Economist's View and Prostates and Prejudices

Labor Force Participation and the Prospects for U.S. Growth
Growth in the labor force is one of two key determinants of the nation's maximum sustainable, or potential, rate of economic expansion. For more than five decades, a growing labor force provided a sizeable boost to the potential rate of expansion in the U.S. economy. Driven by the emergence of the baby boom generation and the entry of women, growth in the labor force added about 1.7 percentage points per year to the average annual growth in potential real GDP from 1948 to 2001 (CBO 2007).

The current period and foreseeable future look quite a bit different. Since 2001, labor force growth has contributed an average of just 1.1 percentage points to potential real GDP growth, with the contribution tending to diminish over time. In fact, as baby boomers age into retirement and key drivers of rising participation rates over the past 50 years (in particular the entry of women) stabilize, the Congressional Budget Office (CBO) expects labor force growth to add only 0.9 percentage point to potential real GDP growth from 2007 to 2012 and 0.5 percentage point from 2013 to 2017. Absent faster gains in productivity—the other key determinant—these developments translate into projected potential growth in real GDP of 2.7% per year compared to the annual average rate of 3.4% between 1950 and 2006.

This Economic Letter reviews the factors contributing to the projected slower pace of labor force growth over the next decade and focuses in particular on the challenges and uncertainties surrounding one aspect, labor force participation behavior.

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