US labour market: The importance of breaking even

Cooling labour market demand

In recent months, US job creation has slowed significantly, pointing to a cooling labour market. Non-farm payroll growth has averaged just 75,000 new jobs per month so far in 2025 - including only 22,000 in August - compared with an average of 168,000 in 2024 and 216,000 in 2023. Moreover, as the chart below illustrates, job gains have become increasingly uneven, with most of the new employment now concentrated in the education and healthcare sectors.

Monthly change in non-farm payrolls (3-month moving average)

Source: BLS, Bloomberg

A softening in labour market conditions is also visible in other indicators and surveys. The number of unemployed people now exceeds the number of job openings for the first time since the pandemic related surge in unemployment, and job seekers are remaining unemployed for longer. Sentiment data shows a similar pattern: the Conference Board’s survey reports a steady decline in the share of respondents describing jobs as “plentiful” versus “hard to get,” while the NFIB’s small business survey shows a persistent decline in hiring plans.

US Job opening vs. Unemployment

Source: BLS, Macrobound

There are several reasonable explanations for weaker labour demand. Interest rates, though lower than their peak, remain restrictive. This year trade policy uncertainty has weighing on business sentiment, and real income growth - particularly among lower- and middle-income households - has slowed, putting pressure on the consumer. It is also possible that expectations of automation and artificial intelligence adoption are already discouraging some firms from expanding headcount.

However, despite weaker hiring, there is little evidence of large-scale layoffs. Aside from a temporary spike in government job cuts in Q2, layoffs tracked by the Challenger Job Report have not increased meaningfully and even declined in September. Similarly initial and continuing jobless claims show no noticeable deterioration. While monthly job creation has slowed, unemployment has remained surprisingly stable, standing at 4.3%, just 0.1% higher than a year ago and still close to official estimates of the long-run neutral unemployment rate.

US Unemployment rate

Source: BLS, Macrobond

At this summer’s Jackson Hole Symposium, Federal Reserve Chair Jerome Powell referred to a “curious kind of balance” in the labour market - marked by slowing demand but also slowing supply. Indeed, it seems developments on the supply side are the key to understanding current labour market dynamics and the stable unemployment rate.

Tracking slower supply

Preliminary labour force data can be unreliable due to subsequent revisions, but present evidence suggests growth in the labour force is under pressure. Falling participation rates are at least part of the problem - some of this is cyclical, as discouraged workers often drop out of the labour force when hiring slows. More significantly, participation among the over-55 age group continues to fall following the pandemic-era adjustment. The participation rate for this bracket has declined from 40.3% before the pandemic to 38.1% today. Given the demographic bulge of the baby boomer generation, early “excess” retirements in this category translate to a significant drag in overall participation.

However, the primary driver of slower labour force growth is not participation but a slowdown in population growth, more specifically net immigration. In the years following the pandemic, legal and unauthorised immigration surged, as labour shortages coincided with less restrictive policies and lighter enforcement under the Biden administration. The Congressional Budget Office estimates that net immigration reached 2.8 million in 2022, 3.3 million in 2023, and 2.7 million in 2024, far above the pre-pandemic average of 920,000. In the 12 months ending June 2024, 84% of US population growth was driven by net international immigration.

US Population growth & projections

Source: US CBO

This trend has been put in reverse. A policy shift in the final months of the Biden administration, followed by tighter restrictions and an increase in deportations under the Trump administration, has sharply reduced both lawful and unauthorised immigration. While several measures have been introduced to limit legal entry, the steepest decline has occurred in unauthorised immigration. Although this cannot be directly observed, encounters (non-US citizens stopped by authorities) reported by U.S. Customs and Border Protection (CBP) serve as a proxy - and have collapsed to their lowest levels on record. Analysis from the Pew Research Centre, based on the recent Census Bureau’s Current Population Survey, even suggests that the US immigrant population may even have begun to decline in 2025.

US Custom boarder protection encounters

Source: DHS, Macrobond

Understanding these shifts is crucial when interpreting payroll trends. If population and labour force growth slow meaningfully, the so called “breakeven” employment rate - the number of monthly jobs needed to absorb new workers without raising unemployment - falls as well. Although data limitations make precise estimates difficult, research from the Dallas Fed suggests that the breakeven rate has recently declined to around 35,000 jobs per month, having averaged around 173,000 jobs in 2024.

Monthly change in non-farm payrolls vs. Estimated breakeven rate

Source: Dallas Fed, Bloomberg

The importance of breaking even

A lower breakeven rate has two important implications.

Firstly, if the breakeven rate is lower, it makes recent sluggish payroll growth slightly less concerning since it is less likely to introduce slack to the labour market and push up the unemployment rate. Indeed, if the breakeven rate continues to fall - potentially even turning negative, as some analysts suggest - the labour market could tighten even amid slower job creation. More concerningly, a persistently weaker pace of labour force growth will constrain US potential output, weighing on both short- and long-term growth. Fewer jobs and pay checks added to the economy will translate to slower GDP growth. The post-pandemic rebound in labour supply was key to delivering the soft-landing and “immaculate disinflation” of recent years -  an unlikely combination of strong growth, falling inflation and high interest rates. If we see a lasting shift in labour force growth, all else equal, it threatens the opposite with a souring mix of growth and inflation in the economy.

Secondly, these dynamics carry significant implications for monetary policy. If the breakeven rate is indeed lower and the labour market is not as weak as headline job growth suggests— it reduces the urgency for rate cuts. Fed rate cuts will do little to change labour force supply, indeed easing too aggressively whilst demand and supply is balanced could tighten labour conditions inadvertently, putting upward pressure on wages and inflation.

With limited and lagging data, policymakers face an unusually difficult challenge to calibrate rates in the coming months and avoid a policy error.