21st Century Economics

In the 60’s and 70’s, as the baby boomers moved into the marketplace, the flood of labor drove labor prices down and created intense competition for jobs. The early boomers - born in the late 40’s and early 50’s - moved into and up the corporate ladder fairly easily but they were still there when the late boomers - born in the late 50’s and early 60’s - arrived. This slowed expansion and limited movement up the corporate ladder.

This and other aspects of the massive movement of the baby boomers into the labor force have had far reaching effects on our economy and on the world economy. Many of these effects are not immediately obvious.

Let’s examine some:

As the competition for jobs increased, businesses found that they did not have to pay premium rates for labor to get a good labor force. Conversely, they discovered that they could grow in size of the labor force while keeping their percentage of investment in labor about the same. This allowed many companies to grow every large at relatively modest increases in labor costs.

For awhile, the large labor market and large company sizes worked well but when normal cost of living and inflation caused labor prices to rise, the companies found they had a glut of labor that they did not need and that productivity was inefficient. This set up the stage for massive layoffs in the late 80’s and early 90’s that eliminated entire layers of management and consolidated tasks into fewer workers.

The lower labor cost prompted many companies to NOT invest in labor saving devices such as robotics in the automobile industry. Meanwhile Japan did invest in robotics and other forms of automation and labor saving devices.

When the slowly rising labor costs did push US companies to re-examine their labor situation, they found themselves no longer competitive with foreign manufacturers and labor markets. This setup the massive movement to move labor off-shore and into cheaper third-world labor markets. The loss of revenue from the labor and taxes of the lost jobs created recessions in 1975, 1980, 1982 and 1990. The median household income dropped to a 14 year low in 1982 and dipped again to 1971 levels in 1994. During that same period, personal savings as a percentage of disposable personal income dropped to record lows in the late 80’s and has continued lower every since. It hit 3.8% in 1997, the lowest level in 58 years.

Because it took time to adjust the labor market and the productivity efficiencies to the global market changes, the business inventories versus sales ratio rose to a record high in 1991 of 1.80 before falling to a low of 1.35 in 1999. This 1991 figure meant that we had more supply than demand and prices, at that time, were not competitive. This put even greater pressure to lower prices to clear out existing inventories and to control production.

For reasons not entirely clear, there has been a remarkable correlation between the percentage of the labor force that is aged 16 to 34 and inflation. As the boomers moved through this age group in the late 70’s and early 80’s we saw double digit inflation. One theory is that the politics of the economy followed the mood of the voters - at that time, being more liberal than conservative. As he boomers move into their late 40’s and 50’s, we should be able to expect a more conservative economic policy being demanded by the voters.

As the work force ages, there will be changes in how the labor is performed. For instance, one grocery chain found that its employee turnover rate dropped from 400% per year to just 80% per year when they began to hire more older workers.

The middle boom years, 1964 to 1977 when birth rates were down, will create a relative scarcity of workers that will have the reverse effect that the boomers had. Labor wages will climb as companies compete for the fewer workers available. In fact, labor costs have risen by 45% over the past 10 years. There will also be a renewed interest in capital investment in labor saving equipment such as robotics and computer automation. This has created a large rise in investments in plant and equipment since the mid 1990s. It is therefore not a surprise that in 1997, the business investment in plant and equipment as a share of total economic activity rose to a record level of 16% in 1997 (not counting WWII years).

All in all, the demographic economy of the boomer labor force has been one of intense competition in a buyers (employers) market, over supply and lowered wages. In the later retirement years of the boomers, that trend will reverse and there will be an intense competition in a sellers (employees) market, a significantly reduced market and higher wages.

It should be noted that the present economic bull years when the boomers are investing heavily in business and industry, there have been significant expansions of those businesses. This is reflected in the lowest unemployment figures in decades. Unfortunately, when the bulge of the boomer’s prime employment years pass, the period from 1964 to 1977 produced a greatly reduced birth rate. This expanded demand plus the reduced supply will drive wage prices up, unemployment will remain low and there will be a major growth in incentives and benefits to attract and keep workers.