Population Aging Is Restraining Labor Supply and Lowering Breakeven Job Growth

Population aging has structurally weakened US labor supply, lowering the job-growth pace compatible with stable unemployment while keeping the labor market broadly balanced.

• US labor-force participation fell to 60.2% in April 2020 and reached 61.4% over the summer, while prime-age participation has recovered and aggregate participation remains below its pre-pandemic peak.
• The decline among workers aged 55 and over is concentrated in the 65+ cohort: participation among 55-64-year-olds has risen above pre-pandemic levels, whereas participation among those aged 65+ continues to fall as their population share within the 55+ group increases.
• Immigration supported labor-force growth during the post-pandemic expansion, especially in 2024 when native-born labor-force growth was negative, but the contribution of foreign-born workers has recently diminished and turned negative.
• Softer labor demand has offset constrained supply: the vacancy-to-unemployed ratio is now near 1, after the excess demand of 2021-22 gradually faded during 2023 and 2024.
• MUFG estimates breakeven employment growth using trend labor-force growth, a 4.4% Congressional Budget Office equilibrium unemployment rate, a Christiano-Fitzgerald filter, a March 2020 break adjustment and BLS projections; the resulting estimate is below even the 25th-percentile low-supply benchmark since 2010.
• The analysis suggests that labor-market-driven inflation should remain limited while demand cools alongside supply, but renewed hiring acceleration without stronger labor-force growth could recreate labor-market tightness.

Takeaway: Investors should treat weak payroll growth cautiously because demographic supply constraints mean fewer jobs are needed to keep unemployment stable; the Federal Reserve can focus mainly on inflation unless labor demand reaccelerates relative to supply.