Shrinking US Labor Force Raises Inflation Concerns

The US labor force has been shrinking over the past year due to unauthorized immigrants leaving the country and a decline in labor force participation rate, according to BCA Research. The research firm examined whether a declining unemployment rate will keep US inflation above the Federal Reserve's target.

BCA Research observed that the contraction in the US labor force has lowered the threshold of job growth needed to bring the unemployment rate down. Investors are now questioning whether the labor market will tighten sufficiently to hold inflation above the Fed's target even if tariff and energy effects diminish over the coming year.

Jonathan LaBerge, a researcher at BCA, noted that the Phillips Curve's depiction of the link between unemployment and inflation is conflicting. He pointed out periods spanning 1999-2000 and 2018-2019 when unemployment was below 4% without high inflation, contrasting with higher inflation accompanied low unemployment in the late 1960s and during 2022-2024.

BCA Research believes a below 4% unemployment rate could prove inflationary this time since the combination of low unemployment and low inflation in the 1990s stemmed from productivity gains. However, LaBerge stated that no such gains are visible in the current productivity data, and inflation expectations were much lower during 2018-2019, which likely restrained wage growth.