Here’s Why People Are Working Less

Via Andrew Van Dam, a new paper tries to estimate why there are fewer people working than in the 90s. Much of this is due to the aging of the workforce, but even among prime working-age people the employment rate is down. Here’s the employment-population ratio for those aged 25-54 since the mid-90s:

The peak of the dotcom boom is probably not the right comparison, but even if you use the mid-90s more generally as a baseline, about 2-3 percent of the working-age population has dropped out of the workforce over the past two decades. Why? Here’s what the authors came up with:

For practical purposes, the entire story is China and automation. The other three factors had a minimal effect, and the following things had no effect:

  • SNAP (food stamp) expansions
  • Obamacare/Medicaid
  • More generous EITC
  • Increased rates of spousal employment
  • Increased difficulties due to lack of family leave
  • Expanded immigration
  • Decline in unionization

The China effect is a one-off phenomenon, and it’s pretty much over. We’ve lost all the jobs we’re going to lose. Automation, however, is just getting started. I don’t personally expect it to have a big impact in the near future, but starting in the mid 2020s I think it will. This is the biggest economic challenge of the next few decades.