American workers face a few challenges over the next three decades which could cause slow wage and labor market growth, according to a federal report Thursday.
Workers have faced particularly difficult times over the last decade. A strengthening labor market and renewed interest in the working class have sparked some optimism. The Congressional Budget Office (CBO) found in its budget outlook report that workers still face some problems over the next three decades.
Workers can expect three major obstacles in the coming decades. The report foresees slower average wage growth, slower labor market growth, and less productivity. The issues primarily stem from further decreases in the labor force participation rate, fewer incentives to work, federal spending, and higher tax rates.
“The potential labor force grows by 0.4 percent per year, on average, for the next 30 years,” the report states. “The average annual growth rate over the 1967–2016 period was 1.5 percent. That slower projected growth in the potential labor force is mainly a result of the aging of the population and the relative stability in the participation of women in the labor force after decades of increases.”
The CBO makes its projections based on current law. President Donald Trump and congressional leaders have promised to rollback regulations in the hopes of spurring economic growth. They have also promised to lower tax rates and simplify the tax code.
“Higher marginal tax rates on labor income also would reduce people’s incentive to work, and the increase in the marginal tax rate on capital income would reduce their incentive to save,” the report states. “All told, less private domestic investment and a smaller labor supply would result in lower economic output and income than would otherwise be the case.”
The labor market is also expected to become slightly less productive in the coming decades. Productivity measures the average real output of labor and capital services combined. It is expected to increase an average of 1.2 percent annually until 2047. The average rate has been 1.4 percent since 1950.
“Increased borrowing by the federal government under current law generally would crowd out private investment in productive capital in the long term,” the report states. “Less private investment in capital goods would make workers less productive, leading to lower wages and a smaller supply of labor.”
Workers can also expect wage growth to be fairly slow at an average of 1.1 percent annually over the next three decades. Higher income households are expected to drive much of the increase. Increased healthcare costs are also expected to be a drain on take home pay.
The unemployment rate will likely stay relatively stable despite changes elsewhere. Workers should also work fewer hours as workforce demographics shift towards populations that tend to work less. The Gross Domestic Product (GDP) is also expected to grow slowly with lackluster labor market growth being a contributing factor.
The slow labor market growth can be partially attributed to further declines in the labor force participation rate. The participation rate tracks the number of employed and those actively seeking work as a percentage of the total population. The report forecasts that it will decline from 62.8 percent this year to 59.3 percent in 2047.
“The aging of the population is the most important factor driving down the overall participation rate over the next 30 years,” the report states. “Because older people tend to participate in the labor force at lower rates than younger people, the aging of the population is expected to significantly dampen the rate of participation over the next 30 years.”
The participation rate also factors in those who have suffered long-term joblessness, unlike the employment rate. The report points to a few other factors that might account for the decline. The large percentage of people retiring, for instance, could be compounded by lower participation rates among younger generations.
“First, members of subsequent generations, who are replacing baby boomers in the labor force, tend to participate in the labor force at lower rates than their predecessors did at the same age,” the report states. “Second, the share of people receiving disability insurance benefits is generally projected to continue to rise, and people who receive such benefits are less likely to participate. Third, the marriage rate is projected to continue to fall, especially among men, and unmarried men tend to participate in the labor force at lower rates than married men.”
The CBO expects these other factors to be upset by having a more educated population, changes in racial composition, and more Hispanic workers. The rate has been in decline for a few decades, but the trend became drastically more severe following the last recession roughly a decade ago.
The CBO economic outlook also foresees massive debt increases over the next three decades. The issue primarily stems from increased spending outpacing revenue. The report warns the growing federal debt will hurt the economy, and restrict future budget policies.