Mark Schniepp
August 2026
The labor force represents all residents in the jurisdiction (U.S., State, or County) who voluntarily seek employment. Not all residents seek employment because they (1) are not of age, (2) are retired, (3) are not capable of working, or (4) simply choose not to participate in the workforce.
Growth of the labor force
The labor force typically grows in sync with the population. Workforce eligible participants in the population include all men and women age 16 and over with both a willingness and capacity to work.
Not all people 16 and over choose to formally work. Many will remain homemakers, family caretakers, are financially independent, or will be supported by means other than their own earnings.
The size of the labor force has moved in step with the population, until recently.
The 2020 pandemic created a behavioral change that reduced labor force growth despite slower albeit positive population growth.
Growth today is influenced by the aging population, changes in immigration policies, and a slower rate of hiring in the labor market.
Retirement of the Baby Boomers
The largest factor slowing the growth of the labor force is the rising retirement rate of the baby boom generation (born between 1946 and 1964 and representing anyone aged 62 to 80 years old today). Due to improved health and longevity, many boomers will continue to work beyond typical retirement ages but more will not. Their departure from the labor force which was amplified by the onset of business lockdowns in 2020, together with the choice by many two-worker households to become caretakers for sick family members and/or to home school their children. One then dropped out of the labor force.
The labor force began to resume a normal growth trend by 2022 but that growth rate is much lower than the pre-pandemic rate. Consequently, today the labor force is much lower than the pre-pandemic trend line suggests. This is the red line in the chart.
The lower labor force today (6 million off trend) is now being exacerbated by new immigration policy since January 2025 that has reduced foreign in-migration by 85 percent.
The Trump Administration’s New Southern Border Policies
The immigration explosion that characterized the southern border of the United States in 2022, 2023 and 2024 was abruptly ended on Trump’s first day of office. “Remain in Mexico” has been reinstated. “Catch and release” has been replaced with “Catch and Detain.” Entry of migrants at the southern boarder was suspended until the “invasion” was abated. And expanded use of expedited removal for illegal immigrants already in the U.S. has been funded.
An estimated 10 million net migrants entered the U.S. through southern U.S. border stations under the Biden Administration, an average of 2.5 million per year. That number has now dwindled to an estimated 321,000 in 2026, including the northern border.[1]
Currently, the estimates are either negative or are trending toward negative net international migration. If confirmed negative, this will be the first time the United States has lost international migrants in more than 50 years.
Because foreign born migrants into the U.S. are a disproportionately work-oriented group, they broadly expanded the U.S. labor force in 2023, 2024 and 2025. Now that this flow has been reduced to near zero or even negative with deportations, this is a principal reason for very low unemployment rates nationwide, and why despite very low rates of employment growth, there is no visible trauma in the labor markets this year.
California
Labor force growth has now turned even lower in California, down more than 1.0 percent year over year in June. Declining population and labor force is largely the result of residents leaving California for more affordable states, and the meaningful reduction in net foreign immigration relocating into California.
The labor force has been shrinking over the last 4 months, in tandem with the population decline that preceded it during 2025. There are now fewer people either working or looking for work in the state.
If this trend continues, the pool of workers from which existing or prospective firms can draw from will contract. Workers from other states will be needed to fill open positions, but that inflow is much less than the outflow of workers to other state.
Fortunately however, job creation in California has been negligible. The shrinking labor force is occurring faster than the shrinking workforce, causing the unemployment rate to decline.
So, while California does not show any signs of escalating unemployment, the lack of available workers does represent a serious impediment for firms wanting to or needing to hire. More people comprise the workforce in California today than at any other time. Growth is not projected to increase much going forward. But it will take AI and it’s supporting systems within the productive chain more time than we are expecting to achieve meaningful advances in productivity. Consequently, we are in a transitional period where we still need human workers for most jobs while technology races to accelerate the pace of supporting systems such as robotics to implement instructions from the rapidly advancing AI brain.
Implications
The U.S. continues to grow in terms of total employment and population, though the rates of growth have meaningfully slowed to a crawl. Nevertheless, there are more households creating income and providing revenues to federal, state, and local governments through taxation.
In California, population and the labor force are in decline. Declining population and labor force don’t automatically lead to collapse, but they do mean the region must work harder to avoid slower growth, fiscal strain and reduced services over time.
A declining population and shrinking labor force usually mean slower economic growth, fiscal stress, and structural change for a state or region, unless offset by immigration or big productivity gains.
The big productivity gains could be coming as a result of wider spread implementation of AI systems and the adoption of advanced automations such as robots.
For now, the labor force is the main input into production; when it stops growing or shrinks, it mechanically reduces the economy’s capacity to produce goods and/or services.
A smaller pool of workers can result in staffing gaps in key sectors like healthcare, construction, and services. This does lead to rising wages as firms compete harder for talent.
With fewer workers paying taxes and more retirees drawing pensions and using healthcare, governments face shrinking tax bases and rising age related spending, which can lead to higher tax rates or cuts to services.
Regions with sustained population and workforce loss may see school closures, reduced healthcare access, and underused infrastructure, making it harder to attract businesses or new residents. This could ultimately manifest into a downward spiral.
Possible Responses
Develop incentives to keep older workers in the labor force longer.
Attract migrants to replenish the working-age populations. However, the problem here is housing so more aggressive housing policies would therefore need to be pursued. This will be very difficult with the California Environmental Quality Act largely influencing development in California.
Encourage automation and boost productivity with broader implementation of AI systems. Ultimately, fewer workers will be needed, and existing workers will earn higher rates of remuneration.
Startup companies will be limited since workers will be scarce. They will need to rapidly adopt higher capital-to-labor ratios in their production model to stay competitive.
Because we are an in inflexion point regarding the onset of AI and its ability to replace labor throughout the productive chain, human labor is still required in most industries, including healthcare, construction, leisure and hospitality, and light manufacturing. Consequently, housing policies must adapt to meeting at least a reduced level of demand for new migrant workers today.
[1] Congressional Budget Office, 2024-2026 revised estimates. Brookings institution estimates that net migration in 2025 likely ranged between -295,000 and -10,000. For 2026, the same analysis projects net migration likely between -925,000 and +185,000.
The California Economic Forecast is an economic consulting firm that produces commentary and analysis on the U.S. and California economies. The firm specializes in economic forecasts and economic impact studies, and is available to make timely, compelling, informative and entertaining economic presentations to large or small groups.
