Forget the graying of America. There's a bigger demographic revolution going on right under your nose

You've read plenty by now -- in these pages and elsewhere -- about the swelling ranks of senior citizens ("Redesigning America," June 1988). But don't be misled: the graying of the baby boom is still a few decades away, and right now the over-65 growth rate is actually slowing. Meanwhile, there's a much more dramatic demographic shift -- with momentous consequences for small companies -- taking place on the shop floor. Like the stars of "thirtysomething," the U.S. work force is about to hit middle age.

Two numbers tell the story. First: the number of young workers is declining. In 1985 the 16-to-34 age group included roughly 58 million workers, or fully half the labor force. By the year 2000 that group will lose more than 4 million members. While the work force as a whole is growing, young workers will account for only 38% of the total by then.

Second: the number of prime-age employees is exploding. "Workers between 35 and 44 will increase 41.6%," a recent Small Business Administration report called Small Business in the American Economy observes. "Workers from 45 to 54 will increase by an amazing 72.2%."

There isn't much guesswork in these figures. "Everyone who will be working in the year 2000 has already been born, and two-thirds of them are at work today," a study conducted by Hudson Institute, in Indianapolis, points out. On the other hand, there's plenty of guesswork in figuring out how businesses will respond to the trend. The only certainty is that small firms will bear the brunt of adjustment.

Small businesses have traditionally hired disproportionate numbers of young and inexperienced workers. They come cheaper, and they can adapt more easily to the ups and downs typical of the entrepreneurial sector. In the past 15 years the marketplace has been flooded with just such workers -- baby boomers, older women, and recent immigrants, all looking for their first or second job. Small companies have taken the lead in hiring them.

But consider what will happen as the flood dries up. Employers looking to hire less experienced workers will find fewer applicants and higher wage demands. (In some parts of the low-unemployment Northeast, a teenage grocery clerk already commands $6 an hour.) So more and more companies will try to hire or hold on to middle-aged employees. Small businesses will find themselves fishing in the same job market as IBM and Federal Express -- and facing a whole new set of costs and challenges. Among them:

Older workers expect -- and need -- more benefits. You can get away with bare-bones health insurance and no retirement plan when the average age of your employees is 26. When it's 36, you can't, and if you don't provide what people expect, the best among them will leave. That's one reason for the already-growing number of 401(k) plans and for the widespread experimentation with innovative benefits such as child-care programs and cafeteria plans. But the cost of better benefits may be staggering. "The average large firm spends twice what the average small firm spends on benefits," says Thomas A. Gray, chief economist of the SBA's Office of Advocacy. "If small companies are going to compete, they'll have to boost that benefit package -- and at a time when costs are going up anyway."

Older workers view their jobs differently. Burdened with mortgages and family costs, prime-age workers typically seek out permanent, full-time employment. Small businesses -- which have traditionally relied on a fluid, fast-changing labor force -- will thus need to provide more stable jobs. Older workers also want, as one consultant put it, "the kind of environment where an adult feels treated like an adult" -- and where the job represents more than just a paycheck. Watch for a boom in employee stock ownership plans (ESOPs), which can provide both a generous retirement benefit and a sense of involvement with the company's mission. "ESOPs are especially attractive to workers who expect to remain with one company," says Robert W. Smiley Jr., president of The Benefit Capital Cos., in Los Angeles, "because of the direct connection between their performance and reward."

The aging of the work force changes the terms of competition in the marketplace. With young workers growing scarce, the cost of hiring them will rise. Older workers may be plentiful, but they'll still expect higher compensation and more benefits than younger ones. So no matter whom you hire, your labor costs will go up -- and more so for small companies than for big ones. Small manufacturers relying on low-wage workers will lose part of their cost advantage over larger competitors. Labor-intensive service businesses, such as restaurants and retail outlets, will have to struggle to hold the line on prices.

Companies hoping to survive, argues the SBA's Gray, must boost productivity enough to pay the additional costs. That means speeding up the introduction of new technologies, such as point-of-sale inventory-control systems or computer-numerical-control equipment. It also means investing in training of managers as well as employees. "If you improve the managers, you improve the productivity of all your resources," Gray says.

Right there, of course, is where the middle-aging of the work force may come full circle. In the past, money spent on employee education often disappeared down a rat hole: ambitious, young recipients took the training and ran. But older workers are more likely to stay in one place and apply what they learn toward doing a better job. A small company that can capitalize on that loyalty should find itself well-prepared for the next couple of decades -- when the real graying of America will finally be upon us.


In the 1990s the number of middle-aged workers will explode, with big consequences for small companies.

Age of workers









Source: Workforce 2000: Work and Workers for the Twenty-first Century (Hudson Institute, Indianapolis, 1987) n