Economic conditions - United States ; Labor market ; Unemployment

Michael T. Owyang

English

Research Papers in Economics

NationalEconomicTrends
March 2001
The Baby-Boom Boom
Despite a recent slowdown, the U.S. economy has
achieved its longest period of sustained growth on
record.  In particular, the American economy has pros-
pered since 1997 with relatively low inflation, despite
the unemployment rate remaining consistently below
5 percent.  How could this be?  Economists previously
estimated the natural rate of unemployment to be
between 5 and 7 percent.  Standard economic intuition
suggests that when unemployment persists below the
natural rate, inflation will increase.  One explanation is
that “New Economy” technological advancement has
lowered the natural rate of unemployment.  An alterna-
tive explanation contends that the natural rate depends
on the composition of the labor force.  
In 1985, 28.3 percent of the labor force was over
age 45; in 2000, that share is estimated to be 34.4 per-
cent (according to the Current Population Survey).
This shift reflects the aging of the baby boomers,
who are now between the ages of 36 and 54.  The
projection for 2005, given current population trends,
is that 37.4 percent of the labor force will be over age
45.  What impact does this change in the makeup of
the workforce have on the economy?  Consider both
the NAIRU
1 and the median age of the U.S. labor
force depicted in the accompanying figure.  On aver-
age, unemployment rose during the 1970s as the baby
boomers entered the labor force and the median age
of the labor force declined.  Since 1980, as the baby
boomers have entered middle age, the median age of
the labor force has risen while the trend unemployment
rate has fallen.
What accounts for this apparent relationship?  Two
effects are observed as workers age.  First, employers
can more easily evaluate a worker’s skills and pro-
ductivity, based on work experience.  Second, older
workers are more likely to be matched with suitable
employers for the long term.  Poor matches are sev-
ered relatively early in people’s careers, and new rela-
tionships are formed.  As workers mature, it becomes
more likely that their job matches survive.  An aging
workforce implies less transitional unemployment—
less shifting to find the optimal match.  Employment
data appear to verify this phenomenon.  Since 1960, in
the United States, the unemployment rate for workers
under 45 has been significantly higher than the rate for
those over 45.  One study indicated that the aging of
the baby boomers can account for a reduction in the
natural rate of unemployment of 1.45 percentage points
between 1980 and 1993.
2
One does not have to attribute all of the apparent
reduction in the natural rate of unemployment to “New
Economy” technologies.  The natural rate of unemploy-
ment appears to be subject to demographic changes in
the same way that the crime rate depends on demo-
graphic factors.  If this is true, the economy could be
riding a wave of low unemployment for some time,
notwithstanding any cyclical downturns the economy
might face along the way.
—Michael T. Owyang
1 Nonaccelerating inflation rate of unemployment, a commonly used measure
of the natural rate of unemployment, from the Congressional Budget Office.
2 Robert Shimer, “Why is the U.S. Unemployment Rate So Much Lower?”
NBER Macroeconomics Annual (1998), pp. 11-61.
Views expressed do not necessarily reflect official positions of the Federal Reserve System
Nonaccelerating Inflation Rate of Unemployment
 and Median Age of U.S. Labor Force
5.100
5.600
6.100
6.600
7.100
7.600
Year
R
a
t
e
 
(
%
)
28
30
32
34
36
38
40
A
g
e
 
(
y
e
a
r
s
)
Median Age
(Right Scale)
NAIRU
(Left Scale)
1970 1980 1990 2000

The baby-boom boom

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The baby-boom boom

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