When the first wave of the baby boom generation entered the workforce in the 1970s, they flooded the labor market. The sheer size of this generation increased job competition and suppressed wages for young adults. Demographers at the time predicted this slump would be temporary, expecting wages to rebound in the 1980s as smaller generations came of age.
That rebound did not happen. A recent study published in PNAS investigates why wage stagnation persisted for decades and projects how demographic shifts will reshape the economy over the next fifteen years. The research indicates that the long shadow of the baby boom generation, alongside other workforce changes, sustained high job competition until very recently.
The limits of cohort theory
Steven Ruggles, a researcher at the University of Minnesota, designed the study to test an older demographic theory known as the relative cohort size hypothesis. Proposed by Richard Easterlin in the 1960s, this theory suggested that a generation’s economic prospects depend on its size compared to adjacent generations.
Easterlin argued that a shortage of young workers in the 1940s and 1950s led to high wages and an economic boom. He then correctly predicted that the massive baby boom generation would face intense job competition in the 1970s.
Easterlin also predicted that the economic tides would turn favorable again by 1984, as the number of new young workers entering the market declined. Instead, real wages for young men continued to fall, reaching a low point in 2015, while wages for young women largely stagnated. Ruggles wanted to understand why the theory failed to predict the late twentieth and early twenty-first centuries.
Tracking the flow of labor
To investigate this discrepancy, Ruggles examined historical census data and the American Community Survey. He tracked workforce patterns from 1910 through the present, projecting data forward to 2040.
Rather than just looking at the size of a generation at a specific moment, Ruggles measured the net flow of workers into and out of the labor force over ten-year intervals. This approach allowed him to account for three major workforce variables that the original 1960s theory minimized or missed entirely. These variables were older workers retiring, women entering the labor force, and the arrival of immigrant workers.
Ruggles developed an index of employment competition to capture the true density of the job market. This index measured the total accumulation of new workers who joined the labor force over the previous 50 years as a percentage of the current working-age population.
The lingering impact of the baby boom
The analysis revealed that the surge of workers in the 1970s did not simply pass through the economy and vanish. The baby boomers kept working, occupying jobs and suppressing the need for entry-level hiring for decades.
At the same time, the workforce expanded in other ways. Female labor-force participation rose dramatically between 1940 and 2000. Additionally, changes to immigration law in 1965 led to a massive influx of foreign-born workers, peaking between 2000 and 2010.
When Ruggles combined these factors, his index of employment competition aligned closely with historical wage data. Job competition remained consistently high from 1970 until 2010. The oversupply of labor finally began to peak around 2015, matching the exact year that wages for young adults hit their lowest point.
Projecting a massive worker shortage
The study projects a fundamental reshaping of the labor market in the coming years. Baby boomers began retiring in large numbers in the 2010s, a trend that is currently accelerating.
Alongside these retirements, the United States has seen a 17 percent drop in births since 2007 and a recent decline in immigration. Ruggles projects that by the 2030s, the net entry of new workers into the labor force will drop below zero.
This impending worker shortage could create immense upward pressure on wages. The researcher suggests that Americans born in the 2020s might be the first group in a half century to earn significantly more than their parents. A tight labor market could also reduce generational wealth inequality and provide a boost to labor organizing efforts.
Businesses facing a severe lack of workers will likely increase their investments in the automation of both manufacturing and services. Ruggles notes that these projections rely on current demographic trends holding steady. Sudden shifts in federal immigration policy, severe economic recessions, or rapid advancements in artificial intelligence could alter the demand for human labor.
Additionally, a shrinking workforce supporting a large population of retirees will place substantial financial strain on healthcare systems and Social Security programs. The researcher points out that this burden will begin to alleviate only when the retiree population eventually declines in the late 2030s.
