By Lina Irawan 
Historically, economists estimated that the U.S. economy needed to create approximately 125,000 to 150,000 net new jobs each month simply to keep pace with population growth and maintain a stable unemployment rate. This figure, often referred to as the "breakeven rate of employment growth," accounted for new graduates entering the workforce, a consistent flow of immigrants, and other demographic factors contributing to labor supply. However, as the nation navigates a confluence of powerful forces – an aging native-born population, a dramatic wave of baby boomer retirements, and a significantly curtailed inflow of foreign-born workers – the underlying mathematical equation governing labor market health is undergoing a fundamental transformation.
The most striking evidence of this paradigm shift emerged from a report by Dallas Fed economists earlier this year, which revealed that the breakeven rate of employment growth actually turned slightly negative during the summer and fall of 2025. This counterintuitive phenomenon suggests that, for a period, the U.S. economy could experience stagnant or even shrinking payrolls without a corresponding increase in the unemployment rate. Instead of climbing, the jobless rate would hold steady, or potentially even decline, not due to robust job creation, but due to a shrinking labor pool. This finding is not merely an anomaly but rather a harbinger of what could become the new norm, fundamentally altering how we perceive and measure labor market strength.
Further substantiating this evolving landscape, Oxford Economics recently estimated that the current breakeven rate stands at approximately 50,000 new jobs per month. This figure represents a dramatic decline from just a few years prior, specifically in 2022 and 2023, when the U.S. experienced a surge in immigration and the breakeven rate exceeded 200,000. The rapid deceleration is directly attributable to the two primary forces reshaping the labor supply: the ongoing "retirement tsunami" of the baby boomer generation and the sustained impact of restrictive immigration policies.
The baby boomer generation, born between 1946 and 1964, represents a demographic bulge that has profoundly influenced American society and economy for decades. Their entry into the workforce powered economic growth for much of the late 20th century. Now, as this massive cohort reaches retirement age, the impact is reversing. The "tsunami," as described by Oxford Economics, is projected to peak between 2026 and 2029, with millions of experienced workers exiting the labor force each year. This mass exodus not only reduces the overall labor supply but also creates potential skill gaps in various industries, demanding a new approach to workforce development and retention. The sheer scale of this demographic shift means that the number of people available to work is simply shrinking, irrespective of economic demand.
Compounding this demographic pressure are the restrictive immigration policies implemented and, more importantly, anticipated to be maintained under a renewed Trump administration. Over the past year and a half, these policies have demonstrably slashed the supply of foreign-born labor, a critical component of U.S. workforce growth for centuries. Policies such as increased border enforcement, reduced refugee admissions, limitations on legal immigration pathways like H-1B and H-2B visas, and heightened scrutiny of family-based immigration have all contributed to a significant slowdown in the influx of new workers. Historically, immigrants have been crucial in filling labor shortages, particularly in sectors requiring both high-skilled and low-skilled labor, and have often had higher labor force participation rates than native-born populations. By curtailing this inflow, the U.S. is effectively shrinking its potential labor pool.
Economists Matthew Martin and Bernard Yaros of Oxford Economics project that, assuming these restrictive immigration policies remain in place throughout a potential Trump term and the baby boomer retirement wave continues as expected, the breakeven rate will fall to zero next year (2027) and turn slightly negative in 2028. This means that by 2028, the U.S. economy could theoretically shed jobs each month, and the unemployment rate would still hold steady, or even fall, simply because fewer people are available and actively seeking employment. "Today, the labor market’s speed limit is much lower than just a few years ago, setting the stage for a jobless expansion," Martin and Yaros wrote in a recent note to clients. A "jobless expansion" refers to a scenario where the economy, measured by GDP, continues to grow, but without significant, or even any, net job creation. This can occur through increased productivity per worker, technological advancements, or, in this emerging context, a shrinking labor supply that allows existing workers to produce more with fewer additions.
Crucially, a negative breakeven rate does not automatically translate into a wave of layoffs. On the contrary, Oxford Economics anticipates that overall job growth will remain slightly positive. This nuanced forecast is driven by the resilience of specific sectors, such as healthcare, which are largely immune to the broader business cycle. The demand for healthcare services, for instance, is inherently tied to the aging population – the very demographic trend contributing to labor supply shrinkage – ensuring continued, albeit perhaps modest, hiring in that industry. Over the next couple of years, Martin and Yaros predict "gentle downward pressure" on the unemployment rate, suggesting that even with anemic job creation, the jobless rate is likely to tick down due to the shrinking pool of available workers.
This unprecedented scenario also carries significant implications for monetary policy, particularly for the Federal Reserve. The Fed’s dual mandate focuses on achieving maximum employment and price stability. In the traditional economic framework, weak payroll reports would signal a cooling labor market, potentially prompting the Fed to consider interest rate cuts to stimulate hiring. However, in this new environment, where the breakeven rate is near zero or even negative, anemic job creation may not be indicative of a struggling economy but rather a new equilibrium. Consequently, the Fed is unlikely to "come to the rescue" with rate cuts if payroll reports turn weak, because the unemployment rate could remain stable or even fall due to supply-side constraints. Martin and Yaros emphasize this point, stating, "Slowing or falling employment would have to be accompanied by a large move higher in unemployment and other signs of weakness for the Fed to step back from considering rate hikes and pivot back to cuts." The Fed will need to recalibrate its understanding of labor market health, potentially placing more emphasis on other indicators like wage growth, labor force participation rates (especially for prime-age workers), and the overall balance of supply and demand for labor, rather than just the headline job creation number.
The shrinking labor supply has already contributed to what economists describe as a "low-hire, low-fire" environment. In such an environment, businesses become highly reluctant to lay off existing workers, even during periods of slower demand, due to concerns about future labor scarcity and the difficulty of rehiring. This phenomenon, known as "labor hoarding," was prominently observed during the initial phases of the COVID-19 pandemic and appears to be re-emerging as a structural feature of the labor market. Despite broader geopolitical tensions, such as Trump’s tariffs and potential conflicts, and related price spikes that might typically induce economic uncertainty, the number of Americans filing jobless claims has remained remarkably low.
Economists Britney Jackson and James Egelhof of BNP Paribas elaborated on this trend in a recent report. They suggest that employers are increasingly hesitant to shed workers, anticipating a further tightening of the labor market. This expectation is exacerbated by recent policy developments, including a Supreme Court ruling that allows the White House to terminate Temporary Protected Status (TPS) for certain noncitizen workers. This ruling could potentially remove several hundred thousand documented workers from the U.S. labor force, further intensifying the supply constraints. "This could translate into further downside pressure on the unemployment rate, due to both a declining documented workforce and possibly increased ‘labor hoarding’ by firms, a phenomenon last observed during the pandemic," Jackson and Egelhof wrote. The removal of these workers not only directly reduces the labor supply but also sends a clear signal to employers that the pool of available workers is shrinking, reinforcing the incentive to retain current staff.
This evolving landscape presents significant challenges and opportunities. While a "jobless expansion" might sound alarming, it could also signal an economy becoming more efficient, potentially through increased automation and productivity gains. However, it also raises questions about the long-term sustainability of economic growth, the ability to fill critical skill gaps, and the potential for persistent wage inflation in a perpetually tight labor market. The U.S. will need to grapple with how to maintain economic dynamism and ensure equitable prosperity in an era where the traditional metrics of labor market health are no longer reliable guides. Policymakers may need to consider new approaches to workforce development, targeted immigration reforms to address specific labor shortages, and investments in technologies that boost productivity to offset the shrinking human capital. The coming years will undoubtedly redefine what a "healthy" labor market truly entails in the United States, moving beyond simple job creation numbers to a more complex understanding of labor force participation, productivity, and demographic realities.
