Economists have been dissecting the perplexing decline in labor force participation, with 720,000 individuals exiting the workforce in a single month. Laura Ullrich, director of economics at Indeed Hiring Lab and a former Richmond Fed economist, offers a compelling counter-narrative to the prevailing sentiment. Instead of viewing June’s sharp drop to a 61.5% labor force participation rate—the lowest reading outside the pandemic since 1976—as a sign of widespread discouragement, Ullrich posits that the primary driver is a fundamental issue of labor supply. Simply put, there are not enough available workers to meet the demands of employers.
"Historically, you’ve been able to look at jobs numbers like what came out on Friday and say, ‘okay, there was a decline in leisure and hospitality. Well, that means there’s less demand for those workers,’" Ullrich explained to Fortune. "But I think now, and more commonly as we go forward, it actually could be labor supply driving some of that. There are two reasons why you might not add jobs in a month: One is there’s no demand for workers, the other is there is demand, but there’s not enough supply." This shift in perspective underscores a growing concern about the structural health of the American labor market, moving beyond cyclical downturns to address deeper demographic and societal trends.
The Looming Specter of a Shrinking Workforce
Ullrich’s insights are grounded in extensive research, including a significant May report from Indeed Hiring Lab titled "The Great Mismatch: How a Shrinking Workforce, AI, and Labor Reallocation Will Define the Next 15 Years." This report projected a contraction in the labor force beginning as early as 2026. The primary catalysts identified for this shrinkage are a confluence of evolving immigration policies and what Ullrich terms the "demographic cliff"—the accelerating retirement of the vast Baby Boomer generation. The report’s projections are stark: an estimated decline of approximately 3.7%, or 5.9 million workers, in the labor force between 2025 and 2032, followed by a partial recovery. Furthermore, the analysis anticipates a potential increase in the aggregate unemployment rate by 0.5 to 3.5 percentage points by 2040, potentially reaching nearly 8% in a more severe scenario.
The initial findings of the Indeed report, forecasting a decline in the labor force within the current year, elicited a degree of surprise from Ullrich. "When we first ran the numbers and saw that we were actually predicting the labor force was going to start declining this year, I was like, ‘oh gosh, I don’t know,’" she admitted. This sentiment was echoed in the broader economic discourse. Around the same period, then-Federal Reserve Chair Jerome Powell remarked to reporters that the economy was experiencing "very, very low, nonexistent, really" growth in the labor force. Ullrich interpreted this as a confirmation of their projections: "I was like, okay, I think we are here with the demographic changes and the share of baby boomers that are leaving the workforce."
Even the Bureau of Labor Statistics (BLS), a key government source for labor market data, had previously projected declining participation rates over a ten-year horizon. Crucially, these BLS projections predated the current immigration restrictions. Ullrich anticipates that future BLS estimates will reflect even more pronounced declines, largely due to the demographic profile of immigrant workers. "I think when their estimates come out this next year, they’ll be even more severe declines, because immigrant workers are both younger than native-born workers, but also have higher labor force participation rates," she stated. This suggests that policy decisions regarding immigration can have a substantial and quantifiable impact on the overall size and dynamism of the U.S. labor market.
Demographic Shifts and the Role of Immigration
The demographic underpinnings of the shrinking labor force are multifaceted. The aging of the American population is a well-documented trend, with a significant cohort of Baby Boomers reaching retirement age. This natural demographic shift is compounded by the role of immigration. Data from the BLS reveals a notable difference in labor force participation rates between foreign-born and native-born workers. Foreign-born individuals exhibit a participation rate of 66.3%, compared to 61.6% for native-born workers. This disparity is even more pronounced among men, with foreign-born men participating at a rate of 76.9% versus 65.8% for native-born men. The pattern reverses for women, where native-born women generally have higher participation rates than immigrant women, particularly those with young children, who are less likely to be in the workforce than their native-born counterparts.
Age also plays a critical role in these participation rates. Approximately 70.1% of foreign-born individuals fall within the 25 to 54 age range, considered the "prime-age" working years. This contrasts with 62.7% of native-born Americans in the same age bracket. "If immigration declines, you have two impacts that are related: Immigrant workers tend to be younger than native-born workers, so by definition you get an older workforce, and labor force participation rates, even within the same age groups, are higher, especially for foreign-born men," Ullrich elaborated. The implications of reduced immigration, therefore, extend beyond immediate workforce numbers to shape the age structure and overall dynamism of the labor pool.
The AI Disruption and Sectoral Mismatches
Adding another layer of complexity to the labor market dynamics is the rapid advancement and integration of Artificial Intelligence (AI). Ullrich’s research highlights that AI is not only contributing to a shrinking workforce but also exacerbating a growing mismatch between available workers and the sectors with job openings. AI technologies are projected to have the most significant impact on the information sector, financial activities, and professional business services. These are precisely the sectors that historically have attracted younger workforces and a large number of recent graduates.
In a scenario where AI adoption is highly disruptive, the combined unemployment rate across these three sectors is predicted to surge from 4% in 2025 to 12% by 2032. This translates to specific projected unemployment rates of 21.2% in the information sector, 11.8% in financial activities, and 10.7% in professional and business services. "People go and study things to go work in finance or computer science because those have historically been really successful paths, and so there continues to be people trying to flow into those sectors when actually AI is impacting those first and most severely," Ullrich observed. This creates a bottleneck, where individuals trained for rapidly automating fields find themselves facing diminished opportunities, while demand in other sectors remains unmet.
Conversely, sectors with aging workforces, such as government, healthcare, education, and construction, are struggling to attract new entrants. The report indicates that AI offers little in the way of bridging this gap. Ullrich pointed to internal research on healthcare demographics, citing New Mexico as an example where 39.2% of physicians are over the age of 60. The nursing profession faces a different, yet related, challenge: a significant majority (68%) of nurses entered the profession directly, and a substantial portion (72%) who leave nursing jobs remain within the broader healthcare field. This suggests high credentialing and training barriers effectively seal off the profession from workers in other industries, even amidst considerable demand.
The supply gap is perhaps most acute in low-wage, high-demand fields like home health aide services. As the population ages, demand for these services is on the rise, but wages have not kept pace. "It’s a mismatch problem. In theory, AI should make the match easier, but it still creates this friction that we estimate will bring down employment," Ullrich stated. While AI holds the promise of increasing efficiency, its current application does not appear to be effectively mitigating these critical labor shortages.
"I do not believe there are a lot of AI agents doing work that people used to do, yet," Ullrich clarified. "The investment choices, the purchasing choices of firms of increasing capex spending, that’s offsetting labor. That’s an indirect impact of AI." This suggests that the immediate impact of AI is not direct job displacement but rather a broader economic shift that influences capital investment and labor allocation indirectly.
Indeed’s modeling explored two scenarios for the labor force through 2040: one where AI significantly reduces employment and another where it augments human labor and creates new roles. In both scenarios, demographic factors emerged as the dominant influence. "No matter what we did with AI in our model, demographics were the bigger story," Ullrich concluded. This underscores the enduring power of demographic trends in shaping the long-term trajectory of the labor market.
The Unforeseen Impact of Wealth Transfer
Beyond demographics and AI, Ullrich also flagged a significant factor that Indeed’s current models do not fully capture: the impending wealth transfer from the Baby Boomer generation, historically the wealthiest in U.S. history, to Gen X and older millennials. "Economic theory would tell you that would impact the labor decisions of those people that get those transfers," she suggested. This could potentially lead to earlier retirements among the generations inheriting wealth, concentrated among white-collar professionals who are more likely to be beneficiaries.
The voluntary nature of some of this labor force exit aligns with current household financial security. The Federal Reserve’s Survey of Household Economics and Decisionmaking indicates that the percentage of adults reporting they are "at least doing okay financially" has remained stable at 72%-73% for the past three years. While this is down from a stimulus-boosted 78% in 2021, it does not signal widespread economic desperation that would explain a mass exodus from the workforce. However, this data point precedes the rapid technological advancements of recent years.
"It’s incredibly interesting to be in this demographic situation at the same time you’re in a period of technological innovation," Ullrich remarked, highlighting the complex interplay of these powerful forces shaping the future of work. The convergence of aging populations, evolving immigration landscapes, technological disruption, and significant wealth transfers presents a formidable challenge for policymakers and employers seeking to maintain a robust and dynamic labor market. Understanding these interconnected trends is crucial for developing effective strategies to navigate the evolving economic landscape.
This analysis, originally published in Fortune as "Labor force participation falls to 61.5%, the lowest in 50 years outside COVID, and economists say it’s not just people giving up" by Catherina Gioino, offers a nuanced perspective on the current labor market challenges, emphasizing structural shifts over transient economic anxieties.
