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The American labor workforce has fallen to its lowest participation rate in decades.
Economists have spent the past week debating why 720,000 people exited the labor force in a single month. According to Laura Ullrich, director of economics at the Indeed Hiring Lab and a former Richmond Fed economist, this isn't simply a story of discouraged workers giving up. Instead, it’s a supply-side crisis: there simply aren't enough workers left to fill the roles employers need to staff.
“Historically, a decline in leisure and hospitality jobs would signal a drop in demand for those workers,” Ullrich told *Fortune*. “But moving forward, labor supply will increasingly drive these numbers. There are two reasons a month might see flat job growth: either there is no demand for workers, or there is demand, but an insufficient supply of labor.”
A Shrinking Economy in the Works
In a May report titled *The Great Mismatch: How a Shrinking Workforce, AI, and Labor Reallocation Will Define the Next 15 Years*, Ullrich and her co-authors projected that the labor force would begin contracting in 2026. This shrinkage is driven by a combination of shifting immigration policies and what Ullrich calls the "demographic cliff"—the accelerating retirement of the baby boomer generation.
The report estimates the workforce will shrink by roughly 3.7%, or 5.9 million workers, between 2025 and 2032 before partially recovering. In a more severe scenario, the aggregate unemployment rate could climb by up to 3.5 percentage points by 2040, reaching nearly 8%.
“When we first ran the numbers and saw we were predicting the labor force would start declining this year, I thought, 'Oh gosh, I don’t know,'” Ullrich recalled. Around the same time, then-Fed Chair Jerome Powell told reporters the economy was seeing “very, very low, nonexistent, really” labor force growth. “I realized we were already here, facing the demographic changes and the share of baby boomers leaving the workforce.”
The Bureau of Labor Statistics’ 10-year projections already point to declining participation, and those estimates predate current immigration restrictions. “When their updated estimates come out next year, the projected declines will likely be even more severe,” Ullrich noted, "because immigrant workers are not only younger than native-born workers, but they also have higher labor force participation rates.”
The Immigration Factor
BLS data highlights a stark contrast in participation rates: foreign-born individuals participate at a rate of 66.3%, compared to 61.6% for native-born workers. The gap widens among men, with foreign-born men participating at 76.9% versus 65.8% for native-born men. However, the pattern flips among women, where native-born women have higher participation rates than immigrant women, particularly those with young children.
Age further compounds this effect. Roughly 70.1% of foreign-born individuals are in their "prime-age" working years (25 to 54), compared to 62.7% of native-born Americans.
“If immigration declines, you face a dual impact,” Ullrich explained. “Immigrant workers tend to be younger, so a drop in immigration naturally results in an older workforce. Furthermore, labor force participation rates within the same age groups are higher, especially for foreign-born men.”
The Great AI Mismatch
Meanwhile, artificial intelligence is accelerating a structural mismatch, misaligning available workers with actual job openings. AI is projected to hit the information, financial, and professional business services sectors the hardest—precisely the industries with the youngest workforces and the highest influx of new graduates.
Under the report’s more disruptive AI scenario, the combined unemployment rate across these three sectors could surge from 4% in 2025 to 12% by 2032 (reaching 21.2% in information, 11.8% in financial activities, and 10.7% in professional services).
“People study finance or computer science because those have historically been highly successful career paths,” Ullrich said. “Consequently, a steady stream of graduates continues to flow into these sectors, just as AI impacts them first and most severely.”
Conversely, sectors with rapidly aging workforces—such as government, healthcare, education, and construction—struggle to attract new entrants, and the report finds AI does little to close this gap. Ullrich cited internal research on healthcare demographics, noting that in New Mexico, 39.2% of physicians are over the age of 60.
Nursing faces a different bottleneck: 68% of nurses enter the profession directly, and 72% of those who leave a nursing job remain in the field. This highlights how stringent credentialing and training barriers seal off the profession from career-changers, even amid massive demand. Low-wage, high-demand fields like home health aides face the starkest supply gap of all. As the population ages, demand skyrockets, but pay has stagnated.
“It’s a mismatch problem,” Ullrich said. “In theory, AI should make matching workers to jobs easier, but it still creates friction that we estimate will ultimately drag down employment.”
Demographics Trump AI
Despite the rapid pace of technological advancement, AI's direct impact on replacing human labor is still in its infancy. “I do not believe there are a lot of AI agents doing work that people used to do just yet,” Ullrich noted. “The real impact we're seeing is indirect: firms are increasing capital expenditure on AI, which offsets labor.”
Indeed modeled the labor force through 2040 under two scenarios: one where AI destroys a significant number of jobs, and another where it augments human labor and creates new roles. “No matter what assumptions we made about AI in our model, demographics remained the bigger story,” Ullrich said.
Ullrich also highlighted an upcoming economic shift that Indeed’s current models do not yet fully capture: the historic wealth transfer from baby boomers—the wealthiest generation in U.S. history—to Gen X and older millennials. “Economic theory suggests this will impact the labor decisions of those who receive these inheritances,” she explained, noting that retirement ages could drop unevenly, primarily among the white-collar workers most likely to inherit significant wealth.
Furthermore, the possibility that some of the recent drop in labor force participation is voluntary—rather than driven by economic distress—aligns with data on household financial security. According to the Federal Reserve’s Survey of Household Economics and Decisionmaking, the share of adults who report being at least "doing okay" financially has held steady at 72% to 73% over the past three years. While down from a stimulus-inflated 78% in 2021, this stability does not suggest the kind of widespread economic desperation that would typically force mass exits from the workforce.
However, all of this is unfolding against the backdrop of rapid, unpredictable technological shifts. As Ullrich concluded, “It’s incredibly interesting to be navigating this demographic situation at the exact same time we are experiencing a period of profound technological innovation.”