Immigration Reductions and Labor Market Uncertainty
Seismic shifts in immigration are distorting the U.S. employment picture, making it harder for investors and policymakers to fully understand the current state of the labor market. With the Trump administration’s pledge to reduce immigration through both halting new arrivals and deporting those already present, the U.S. labor supply is expected to shrink.
Long-Term vs. Short-Term Impact of Reduced Immigration
The long-term effect of lower immigration is generally seen as negative. Fewer new workers are expected to lead to lower economic growth as they are needed to replace retirees, fill job vacancies, and support overall economic expansion. However, in the short term, a smaller labor pool results in a tighter job market, which could keep the unemployment rate low, albeit temporarily.
Recent Labor Market Trends
In May, employment figures showed a significant decrease of 696,000 jobs, marking the largest monthly drop since the pandemic’s early days. While nonfarm payrolls increased by 139,000, the unemployment rate held steady at 4.2%, which remains low historically, despite rising from two years ago.
The Impact on Job Growth and Policy
These trends point to a tight labor market, which typically leads to wage increases and potentially more hawkish policy actions from the Federal Reserve. However, this could be a misinterpretation, as a reduced labor supply and declining labor force participation could artificially lower the breakeven job growth rate, the number of jobs needed to maintain a steady unemployment rate.
Slowing Breakeven Employment Growth
According to economists at Morgan Stanley, the breakeven job growth figure fell from 210,000 jobs per month in 2024 to 170,000 so far in 2025, and is expected to decrease to 90,000 by year-end. This downward trend may accelerate if immigration restrictions continue under the Trump administration. Ryan Sweet from Oxford Economics estimates breakeven job growth could soon drop to 50,000 a month due to weaker labor supply.
Uncertainty and Fed Response
The potential for a low unemployment rate for the wrong reasons raises concerns. If the predictions hold, monthly job growth could continue to slow without a noticeable uptick in the unemployment rate, creating confusion for investors and policymakers alike. The Federal Reserve, led by Jerome Powell, has emphasized that the labor market remains solid, but the impact of reduced immigration may signal that the current employment figures are not entirely reflective of a healthy economy.
Net Immigration Projections and Economic Outlook
The Congressional Budget Office projected net immigration of 2 million people in 2025, a decline from the previous year. However, with a hardening stance on immigration, these projections may be too high. Morgan Stanley revised its forecast to just 800,000 for 2025. If these revised figures hold, the U.S. could face a tight labor market with much lower payroll gains, presenting challenges for the Fed in managing monetary policy effectively.