Forecasting worker quality - Precis - Brief Article

Monthly Labor Review, Jan, 2002

Improvements in the quality of the workforce have been among the forces boosting labor productivity in the past couple of decades. In fact, BLS figures show that in the first half of the 1990s, about one-fourth of labor productivity growth in private nonfarm business was due to increases in labor quality, where quality is measured using education and work experience. This dropped by half between 1995 and 1999, to about one-eighth of labor productivity growth. (See "Multifactor productivity trends, 1999," USDL news release 01-125 at http://www.bls.gov/news.release/ prod3.nr0.htm for further details.)

Among the causes of gains in labor quality are rising levels of educational attainment among workers and increases in work experience that are associated with higher productivity. The movement of baby-boomers towards their peak earnings years has been a factor in increasing experience levels and increasing labor quality in recent years.

What can we project the contribution of worker quality to productivity growth (and hence output growth) to be in the coming years? Daniel Aaronson and Daniel Sullivan of the Federal Reserve Bank of Chicago tackle this question and others in "Growth in Worker Quality," Economic Perspectives (fourth quarter 2001). Among their data sources is the March Current Population Survey (CPS), from which they analyze data on earnings, weeks worked, and usual hours worked per week.

Other researchers who have studied U.S. labor quality have also used the cps as a data source--among them are Mun Ho and Dale Jorgenson and the BLS Office of Productivity and Technology. The methodology used by Aaronson and Sullivan resembles those of these other researchers in some ways, with certain differences.

Aaronson and Sullivan report that their findings about past labor quality growth are "broadly similar" to those of Ho and Jorgenson and those of BLS. Like BLS findings, Aaronson and Sullivan's results show a decline in the contribution of labor quality to productivity growth in the 1990s.

Turning to the future, Aaronson and Sullivan forecast a continued decline in the contribution of labor quality to productivity and output growth as we move towards 2010. According to their forecast, improvements in worker skills will account for only about 0.05 percentage point of labor productivity growth and output growth in 2010, down from their estimated contribution in the late 1980s and early 1990s of about 0.40 percentage point.