Labor force growth – Part two

Summary

Labor force growth is one of the primary determinants of an economy's potential rate of economic growth. The American labor force grew at an average annual rate of 1.8% in 2022 and 2023, considerably above its growth rate of the past decade.

Recent strength in labor force growth reflects, in part, strong population growth that stems from immigration. Foreign-born nationals, who currently represent about 20% of the labor force, have accounted for more than one-half of its growth over the past two years. A rise in the labor force participation rate (LFPR) from its pandemic-induced plunge has also supported growth in the labor force.

Looking forward, it does not seem likely that the labor force will continue to grow at the same robust rate that it has over the past two years. Although it is difficult to predict the path of immigration in coming years—yet-to-be-determined policy choices and economic conditions in the United States as well as in foreign countries will affect immigration flows—the aging of the population and marked drop in the U.S. fertility rate in recent years means that the “natural” growth rate of the workforce will slow.

There are some factors that could boost the LFPR further in the near term. More remote work could lift the participation rate, particularly for women with young children, as it has done over the past few years. Strength in cyclically-sensitive industries, which tend to be male dominated, could raise the LFPR rate of prime-age men. That said, the aging of the labor force will likely pull the participation rate lower over the longer-term.

On balance, we estimate that faster labor force growth over the next several years, via more immigration and labor force participation, could raise the potential economic growth rate of the United States by 0.1-0.3 percentage points per annum over the 1.8% potential GDP growth rate that was registered during the last decade.

That noted, there is uncertainty about whether the immigration boom will continue and whether more lofty participation rates will be realized. Additionally, potential GDP growth that is slightly above 2% rather than slightly below would still leave it well short of the +3% trend growth rate that prevailed for much of the second half of the 20th century.

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