APConditions in the labor market affect the economy in two main ways. Whether the labor market is running hot or cold affects the Federal Reserve’s decisions on how best to deliver on its mandate of price stability and maximum employment. And the size of the labor force is critical to the outlook for growth, and much else besides.
The first issue is the crux of monetary policy: It preoccupies investors and analysts. The second is less discussed, more important and now more worrying.
To start with the short term, Federal Reserve Chair Jerome Powell says that the labor market has lately been in “a curious kind of balance,” with low rates of both hiring and firing. The result is persistently low unemployment despite tepid demand for labor. Facing those conditions, the central bank has concluded that, for the time being, interest rates are roughly where they should be. Given all the shocks and stresses assailing the economy, this judgement is debatable.
For the longer term, though, what matters more is the trend of economic growth — which depends on how quickly the labor force is expanding.
At the moment, it isn’t expanding at all.
Also read | China's factories jolt back to inflation on Iran war price shock
A recent note by Fed economists Seth Murray and Ivan Vidangos looks at the potential labor force — a measure that sets cyclical changes in labor-market conditions aside and estimates how many people would be working or looking for work if the economy were running at its maximum sustainable output. To get that number, you multiply the working-age population by the potential (meaning non-cyclical) labor-force participation rate.
In recent decades, population growth has gradually slowed; and lately, it has outright collapsed, thanks to a deliberately abrupt decline in immigration. In 2026 the adult population is on course to grow more slowly than at any time over the last 75 years. In the first quarter, it increased at an annualized rate of just 0.4% (and perhaps by as little as 0.2%, allowing for statistical complications); the average since 1960 is 1.3%. For comparison, in 2020, the pandemic choked immigration and caused some 350,000 excess deaths — but even Covid didn’t crush population growth as severely as this.
Alongside a slower-growing population, the potential labor-force participation rate has also been trending downward. As “potential” implies, structural, not cyclical, shifts are the reason: The population is aging and baby boomers have moved from work to retirement. The arrival of artificial intelligence may intersect with this shift and accelerate it. As the workforce becomes older, it might be more reluctant than average to retrain or adapt to new tasks and big changes in patterns of work. If laid off, workers might check their retirement savings and be less inclined to look for a new role. The potential for serious disruption of the labor market is clear, and effects like these aren’t temporary dislocations.
The net effect of slower population growth and structurally lower labor-force participation might be roughly zero growth in the potential labor force. A slowdown this severe, say the Fed researchers, is unprecedented and will have “significant implications” for the US economy.
Also read | Democrats grow bolder on talk about removing Trump from office after his Iran threats
One is that the Fed’s job will get more complicated. In setting interest rates, the central bank has in mind the so-called breakeven pace of job creation: the number of new jobs required to keep unemployment steady as the working population grows. If growth in potential labor force falls to nothing, the breakeven pace of job creation will fall as well, from its typical rate of 80,000 jobs a month in the decade before the pandemic to zero or less. An abruptly lower number for breakeven employment makes it harder to judge whether the labor market is hot or cold; hence, monetary policy becomes harder to get right.
Again, though, the longer-term implication matters more: Other things being equal, a smaller labor force means less output. Granted, to the extent that AI is implicated in the trend of employment, it may generate higher productivity. Conceivably, an AI-driven productivity miracle could outweigh not only its own structural job-market dislocations but also the burdens of an aging population and sharply reduced immigration. But a boost that forceful would indeed be miraculous. There’s little sign yet of sufficiently broad-based effects. There’s little sign yet of sufficiently broad-based effects. A forthcoming decade of 3% growth in GDP, as blithely projected in the Trump administration’s new budget request, looks downright outlandish.
Why should it matter if output increases more slowly alongside slower growth in population? After all, if there are fewer people here, they won’t need as much stuff. This logic breaks down with the labor force growing more slowly than total population. In any case, economies have a lot of overhead. Spending on defense, for instance, and on many other public goods and services doesn’t fall one-for-one if population, let alone the working population, declines. On the contrary, an older population demands more services and transfers. And the cost of financing the country’s colossal public debt doesn’t fall in line with the number of workers: As the labor force shrinks, the cost per worker goes up.
In this context, the fiscal contribution of immigrants deserves particular emphasis. A recent study by the Cato Institute showed that the taxes paid by immigrants have greatly exceeded all the benefits they receive from federal, state and local governments — including the costs of education, needs-based supports and old-age benefits. This surplus, a subsidy to the rest of the population, amounted to nearly $15 trillion between 1994 and 2023 — enough to cut budget deficits by roughly a third in real terms over the three decades.
Policy needs to focus on what matters: Demographic stagnation, aggravated by design, will make America poorer.
Views expressed here are the author's own, and not EconomicTimes.com's
(You can now subscribe to our Economic Times WhatsApp channel)
The first issue is the crux of monetary policy: It preoccupies investors and analysts. The second is less discussed, more important and now more worrying.
To start with the short term, Federal Reserve Chair Jerome Powell says that the labor market has lately been in “a curious kind of balance,” with low rates of both hiring and firing. The result is persistently low unemployment despite tepid demand for labor. Facing those conditions, the central bank has concluded that, for the time being, interest rates are roughly where they should be. Given all the shocks and stresses assailing the economy, this judgement is debatable.
For the longer term, though, what matters more is the trend of economic growth — which depends on how quickly the labor force is expanding.
At the moment, it isn’t expanding at all.
Also read | China's factories jolt back to inflation on Iran war price shock
A recent note by Fed economists Seth Murray and Ivan Vidangos looks at the potential labor force — a measure that sets cyclical changes in labor-market conditions aside and estimates how many people would be working or looking for work if the economy were running at its maximum sustainable output. To get that number, you multiply the working-age population by the potential (meaning non-cyclical) labor-force participation rate.
In recent decades, population growth has gradually slowed; and lately, it has outright collapsed, thanks to a deliberately abrupt decline in immigration. In 2026 the adult population is on course to grow more slowly than at any time over the last 75 years. In the first quarter, it increased at an annualized rate of just 0.4% (and perhaps by as little as 0.2%, allowing for statistical complications); the average since 1960 is 1.3%. For comparison, in 2020, the pandemic choked immigration and caused some 350,000 excess deaths — but even Covid didn’t crush population growth as severely as this.
Alongside a slower-growing population, the potential labor-force participation rate has also been trending downward. As “potential” implies, structural, not cyclical, shifts are the reason: The population is aging and baby boomers have moved from work to retirement. The arrival of artificial intelligence may intersect with this shift and accelerate it. As the workforce becomes older, it might be more reluctant than average to retrain or adapt to new tasks and big changes in patterns of work. If laid off, workers might check their retirement savings and be less inclined to look for a new role. The potential for serious disruption of the labor market is clear, and effects like these aren’t temporary dislocations.
The net effect of slower population growth and structurally lower labor-force participation might be roughly zero growth in the potential labor force. A slowdown this severe, say the Fed researchers, is unprecedented and will have “significant implications” for the US economy.
Also read | Democrats grow bolder on talk about removing Trump from office after his Iran threats
One is that the Fed’s job will get more complicated. In setting interest rates, the central bank has in mind the so-called breakeven pace of job creation: the number of new jobs required to keep unemployment steady as the working population grows. If growth in potential labor force falls to nothing, the breakeven pace of job creation will fall as well, from its typical rate of 80,000 jobs a month in the decade before the pandemic to zero or less. An abruptly lower number for breakeven employment makes it harder to judge whether the labor market is hot or cold; hence, monetary policy becomes harder to get right.
Again, though, the longer-term implication matters more: Other things being equal, a smaller labor force means less output. Granted, to the extent that AI is implicated in the trend of employment, it may generate higher productivity. Conceivably, an AI-driven productivity miracle could outweigh not only its own structural job-market dislocations but also the burdens of an aging population and sharply reduced immigration. But a boost that forceful would indeed be miraculous. There’s little sign yet of sufficiently broad-based effects. There’s little sign yet of sufficiently broad-based effects. A forthcoming decade of 3% growth in GDP, as blithely projected in the Trump administration’s new budget request, looks downright outlandish.
Why should it matter if output increases more slowly alongside slower growth in population? After all, if there are fewer people here, they won’t need as much stuff. This logic breaks down with the labor force growing more slowly than total population. In any case, economies have a lot of overhead. Spending on defense, for instance, and on many other public goods and services doesn’t fall one-for-one if population, let alone the working population, declines. On the contrary, an older population demands more services and transfers. And the cost of financing the country’s colossal public debt doesn’t fall in line with the number of workers: As the labor force shrinks, the cost per worker goes up.
In this context, the fiscal contribution of immigrants deserves particular emphasis. A recent study by the Cato Institute showed that the taxes paid by immigrants have greatly exceeded all the benefits they receive from federal, state and local governments — including the costs of education, needs-based supports and old-age benefits. This surplus, a subsidy to the rest of the population, amounted to nearly $15 trillion between 1994 and 2023 — enough to cut budget deficits by roughly a third in real terms over the three decades.
Policy needs to focus on what matters: Demographic stagnation, aggravated by design, will make America poorer.
Views expressed here are the author's own, and not EconomicTimes.com's
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