Generation Gap

What happens when the longest post-War recession meets rapid population aging? For starters older workers, many of whom saw their 401(k)s decline in the stock market crash, are working longer. This isn’t to say that older workers are safe in their work. Many have lost their jobs with the unemployment rates for those 65-69 almost trebling from 3.2 percent in January 2008 to 8.6 percent the same time this year.

At the same time younger workers, who experience persistently higher unemployment due to low skills and high job turnover, have also seen joblessness spike. Workers from 16 to 24 years of age began 2008 with an unemployment rate of 12.3 percent and saw the rate rise to 19.8 percent in January of this year.

If the cultural divide between generations, that composed so much of 90s sitcoms looked bad, the knowledge divide between generations will be a disaster for Americas workforce.

All of this is part of a larger shift toward an older population. In a recent presentation, CBO Director Douglas Elmendorf showed that labor force participation, the share of the adult population employed or looking for work, will decline dramatically over the next decade. This is shown in the figure below.

The dotted line indicates what could have happened without the current recession but even along that path labor force participation will decline.

This will have deleterious impact upon national finances. The figure below shows total government revenues (the dark blue line) and spending on a core set of entitlements and defense. Just take a look at this year’s defense budget and you’ll realize that entitlements are the real driver of cost growth here.

This is a well-worn entitlement story. Many retirees being supported by fewer workers become increasingly expensive. The new twist created by the recession is that many of these older workers may work longer. This could increase their benefits and keep younger workers from gaining on the job experience or earning wages at a level that can significantly contribute to current expenditures through the payroll tax.