In a single month, 720,000 people left the American labor force. June’s participation rate fell to 61.5%, the lowest reading outside the pandemic since 1976, and Fortune reported that economists spent the following week arguing over what it meant.
One answer came from Laura Ullrich, director of economics at Indeed Hiring Lab. Her view is that this is not a story about discouraged workers quitting the search. It is about supply. “There are two reasons why you might not add jobs in a month,” she told Fortune. “One is there’s no demand for workers, the other is there is demand, but there’s not enough supply.” Increasingly, she argues, it is the second.
The demographic cliff
The strategic read is simple. A large generation is leaving and a smaller one is not fully replacing it. Ullrich co-authored a May Indeed Hiring Lab report, “The Great Mismatch,” which projected that the labor force would begin shrinking in 2026. She credits two drivers: changes in immigration policy and what she calls “the demographic cliff,” the accelerating retirement of the baby boomers.
The report puts the numbers on it. The labor force is expected to fall by roughly 3.7%, or 5.9 million workers, between 2025 and 2032, before partially recovering. By 2040, the aggregate unemployment rate could rise by 0.5 to 3.5 percentage points, reaching nearly 8% in the harsher scenario.
Ullrich said the figures surprised even her team. “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.’” Around the same time, then-Fed Chair Jerome Powell told reporters that growth in the labor force was “very, very low, nonexistent, really.”
The Bureau of Labor Statistics’ own ten-year projections already point to falling participation, Ullrich said, and they were drawn up before the current immigration restrictions. She expects the next set to be harsher, because immigrant workers skew younger and participate at higher rates.
Who is leaving
The July jobs data sharpened the picture. Overall participation slipped to 61.4%, a full percentage point below December’s level, Fortune reported in August. For people 55 and older, the rate dropped from 37.9% in December to 36.9%. Prime-age workers, those 25 to 54, slid only 0.4 percentage point over the same stretch.
Much of that gap is retirement. Not all of it, though. Adam Shapiro, a vice president at the San Francisco Fed, noted that the post-pandemic fall in 55-plus participation matches the drop during the pandemic itself. His hunch was that record stock prices are letting some older workers retire sooner, and that with the hiring rate below 4%, people are choosing to retire instead of hunting for a new job.
RSM chief economist Joseph Brusuelas was not convinced the wealth effect explains it all. He pointed out that the country has 27 million more Americans age 65 and older than in 2005, and that the immigration crackdown is cutting labor supply as well. “We are simply witnessing a historic exit from the American labor market,” he said.
Where the gaps show
The shortfall is uneven. Government, health care, education and construction all have aging workforces and are not drawing enough new entrants, according to the Indeed report. Ullrich pointed to New Mexico, where 39.2% of physicians are over age 60. Home health aide work faces the starkest gap of all, she said, because demand climbs with an aging population while pay has not kept up.
