The Productivity Tightrope: Two Labor Force Trends That Could Slow The US Economy

Balancing labor supply and employer demand has major implications for workers, families, communities, companies, and governments. Economists and policymakers think a lot about how to maintain this balance.

It’s a relentless challenge for regions around the world, but recent labor shortages in the U.S. have spurred competition for talent and higher pay. Real wages of the country’s blue-collar workers rose by more than 12 percent from 2019 to 2023, for example, and they rose sharply for workers ages 16-24, Black men, and working mothers, partly narrowing gaps that have been growing steadily for decades.

And despite rising wages, inflation in the U.S. has fallen from more than 9 percent in June 2021 to 2.6 percent this October. The national unemployment rate, now at 4.1 percent, has been at or below 4.3 percent since December 2021, the longest stretch since the late 1960s.

The country now has about ten job openings for every nine unemployed people seeking work, a “vacancy to unemployment” ratio more than six times higher than in 2010 as the country emerged from the Great Recession. Put another way, about 7.4 million non-farm positions were unfilled at the end of September, seasonally adjusted, while 6.4 million people were unemployed.

While a tight labor market is generally good for workers, it can also constrain economic growth. Research by the McKinsey Global Institute (MGI) this year showed that gross domestic product—the value of the goods and services the country produces—may have been 1.1 to 1.6 percentage points higher in 2023 if employers had been able to hire all the workers they needed.[1]

Some industries are more “labor-hungry” than others, of course. According to research by MGI, roles that require more physical and manual skills, such as in healthcare, construction, and transportation, have gotten harder to fill today, making growth difficult for many employers in these sectors.

Labor markets also vary by geography. South Dakota, Vermont, North Dakota, New Hampshire, and Nebraska had unemployment rates below 2.8 percent in September 2024, according to the U.S. Bureau of Labor Statistics, and four had rates over 5 percent: California, Nevada, Illinois and the District of Columbia.

Two inexorable trends are slowing the growth of the labor force: an aging population and lower population growth. Both trends are set to accelerate, creating tighter labor markets that could impact companies from growing further.

From 2010-23, the U.S. labor supply—all employed and unemployed people able to work—grew by about 0.6 percent annually. Even if labor participation rates continue to rise at the same rate, labor supply growth could slow to 0.5 percent by 2030 as the working-age population shrinks. Research by MGI shows that without more participation, growth will likely slow to 0.4 percent, well below what will likely be required for the country to maintain its recent GDP growth rate of at least 2.1 percent.

In this scenario, the U.S. could use a range of tools to raise GDP, including providing people over 55 who wish to remain in the workforce with more accommodations; harnessing immigrant talent; and improving productivity, not least through the promise of AI. Women’s participation in the labor force has been growing in the U.S., but it could be even higher with more flexible working arrangements and access to childcare support. Our research suggests that maintaining an optimum balance of labor supply and demand will likely require all of these tools.

Accommodating workers 55 and over

In many nations, older people are working longer. In the US, this could be due to several reasons, such as retirement plans evolving, healthier older adults, and an increase in less strenuous jobs. Yet, since 2010, the share of people aged 55 to 64 in the workforce in the U.S. increased by 1 percent – below what our analysis projects will be required to offset the impacts of an aging population. Other developed countries such as Canada, the UK and Australia have raised their share by at least 5 percent, reflecting shifting pension policies, attitudes toward retirement, and employers’ efforts to appeal to older workers. Japan and Italy have done even better, increasing their shares by 12 and 23 percent, respectively.

To best accommodate those workers 55 and over who wish to remain in the workforce, research published in the Harvard Business Review suggests designing purposeful roles, offering more flexible schedules, communicating clearly and candidly, building camaraderie, and taking other steps to ensure workers feel respected and valued.

Engaging immigrant workers

As the U.S. economy expands, it will require more workers than population growth alone can supply. This is because it could take 20 years or more for a natural increase in population to affect the labor market – a baby born today cannot meaningfully work for roughly 20 years. Immigrants can help grow the labor force, particularly because many are of working age and can participate immediately.

Today, more than 15% of the U.S. population was born in another country, and the Congressional Budget Office estimates that by 2033, the US labor force will increase by 5.2 million people, mostly due to higher net immigration. New immigrants could help close worker shortages in professional and business services, healthcare and social assistance, and leisure and hospitality – sectors that each had more than 900,000 openings in September 2024, according to the Bureau of Labor Statistics. Addressing these shortages could have crucial consequences, including impact on health. The American Hospital Association currently forecasts a shortage of about 100,000 critical healthcare workers by 2028.

Raising labor productivity

Raising labor productivity (how much an hour’s work contributes to GDP) is an economic imperative. According to our research, the U.S. can maintain its rate of 2.1-percent GDP growth with 2.3-percent productivity growth—the average rate in the years before the Great Financial Crisis. Maintaining current productivity growth of only 1 percent would leave the country 0.6 percent short of what it would need to maintain GDP growth, even if participation rates continue to increase and the labor supply grows at 0.5 percent.

Labor productivity is driven largely by investments in the equipment and facilities workers use; human capital development, including education and training in specialized skills, from carpentry to nursing; and advances in technology and automation. Historically, advances in technology and automation have been a net positive for jobs, including when particular tasks within occupations have been automated. In this same vein, we expect AI’s contributions to productivity growth to accelerate. Automation, particularly of routine tasks, can leave workers more time to focus on creative and second-order questions.

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Demographic fundamentals and productivity will always play big roles in shaping our economy. As in other periods of rapid technological change—from the adoption of electricity and build-out of interstate highways to the rise of the internet—the public and private sectors will need to work together to create value and make sure that everyone benefits from growth.

While economic balancing acts have become more challenging, many fundamentals remain unchanged. Millions of people want to master new skills and find good jobs, and business owners need to hire, retain, and train workers to seize new opportunities. As a nation, we should be able to bring them together to drive broad-based economic growth and prosperity.

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Maurice Obeid is a senior partner in McKinsey & Company’s New York office. He thanks colleagues for their contributions to this article: Ryan Luby, a senior expert & associate partner at the McKinsey Global Institute, Tim Bacon, a capabilities & insights expert, Michael Neary, an engagement manager in the San Franscisco office, and Andrew Shearer, the firm’s head of communications & public affairs in the Northeast U.S.

[1] “Help wanted: Charting the challenge of tight labor markets in advanced economies,” McKinsey Global Institute, June 26, 2024