(Bloomberg) — Federal Reserve Chair Janet Yellen’s focus on wages to help gauge the strength of the job market could need fine tuning as baby boomers approach the twilight of their careers and millennials jump in to fill the void.
As today’s middle-aged Americans grow older, they are leaving their prime working years behind, trading big salaries for part-time gigs or retirement, just as an even larger group of young people come into the labor force at entry-level salaries. The seismic shift may be one reason behind the sub-parwage growth that Yellen says still shows “significant slack” in the job market.
“If wages are softer for demographic reasons, that’s just a fact of life,” said Ray Stone, managing director at Stone & McCarthy Research in Princeton, New Jersey. “The extent of labor-market slack may be less than is being advertised by Janet Yellen.”
As the labor pool becomes weighted toward these age extremes, average earnings could be depressed for years, making them a less-useful tool in signaling a tightening of the labor market. A similar dynamic is influencing the unemployment rate, which is dropping faster than central bankers predicted in part because of the retirement of baby boomers.
Rapid improvement in the labor market would prompt the Fed to raise interest rates sooner to prevent inflation from rising too much, while slower employment gains would keep rates low for longer. Fed officials currently anticipate raising their benchmark interest rate from almost zero sometime next year, according to projections released in June.
Boomers, the more than 76 million people born between 1946 and 1964, began turning 65 three years ago and all will have reached that age by 2030. All millennials, the 82 million people born between 1981 and 2000, will have entered prime-working years — the age group from 25 to 55 — by the end of 2025.
The group sandwiched in between, Generation X, is just 57 million people strong.
The result: 25- to 34-year-olds will make up 22.5 percent of the workforce by 2022, compared with 21.6 percent in 2012, the Bureau of Labor Statistics estimates. The share of America’s oldest employees, those over 55, will expand even faster — to 25.6 percent from 20.9 percent and led by people 65 and older.
Meanwhile, the share of 45- to 54-year-olds in their best earning years will drop by 3.3 percentage points in the decade ending 2022. That age group shrank in 2010 for the first time since 1983, and has contracted each year since.
Hollowing out the middle-aged working population could cut median earnings because such employees bring home the biggest paychecks. The median 45- to 54-year-old household earns $66,400 a year, compared with $51,400 for 25- to 34-year-old households and $33,800 for those 65 and older, according to data from the Census Bureau.
“When baby boomers hit peak earning time, wages were forced up, budgets looked good, everything was very rosy,” said Austin Nichols, an economist at the Urban Institute in Washington. “Policy makers forget that someone has to pay for that pig in the snake when the pig retires, and we’re experiencing the leading edge of that.”
Full-time middle-aged earners made a median $898 per week in the first quarter, Bureau of Labor Statistics data show. Workers older than 65 earned $809 and those between 25 and 34 made just $727.
Homer Wong, 57, and Zackary Hargett, 22, are in the thick of the generational shifts that will influence economic data over the next decade.
Wong, who lives in Redwood City, California, is returning to work at Hewlett-Packard Co. after taking an early retirement package from the world’s second-biggest personal computer maker when he was 50. He worked at a credit union after leaving his job as HP’s director of strategic alliances, and will earn less in the executive development and coaching role he starts Aug. 1 than he made seven years ago.
“At this point in life, it’s more about the kind of people I’m working with than the salary,” said Wong, who said he could see himself working past 65. “As long as I’m having fun, I’ll keep working.”
Wong’s outlook is typical of older workers, said Martha Deevy, director of the financial security division at Stanford University’s Center on Longevity near Palo Alto, California.