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• We now estimate our 2025 monthly breakeven employment to be ~40k, well below our 2024 estimate of ~100k. This comes in light of more stringent immigration policy amidst a massive wave of retirements. This effectively means that job creation can slow meaningfully in the US while the unemployment rate holds steady, and the labor market remains historically tight.

• Over the next few years, should strict immigration policy hold up, we could reach a point where the payrolls are shedding jobs on a monthly basis (i.e., negative payroll growth) but the unemployment rate does not rise.

• While structural factors have pushed the breakeven employment figure lower, we still observe cyclical weakening in the labor market and expect the unemployment rate to tick up to 4.5% by year-end. Still, this remains a historically tight job market that will keep a floor under wage growth and keep cyclical weaknesses from bleeding too deeply into consumer spending and help the US economy avoid a recession.

The current labor market backdrop in the US is anything but status quo. With weak job growth in cyclically exposed sectors, it is evident that the labor market has reached a turning point. At the same time, an aging population has fueled demand for (acyclical) health care hiring, which now accounts for a majority of payroll growth. But looking under the hood, the large health care gains are masking weakness that we see in trade-exposed sectors like wholesale, retail, and manufacturing. And record retirements coupled with more stringent immigration policies have led the labor force to shrink. The key takeaway here is that the U.S. economy needs to create fewer jobs for fewer workers. 

 In this context, it has become harder to ascertain what constitutes a solid nonfarm payroll (NFP) report. And critical in answering this question is the concept of breakeven employment. Breakeven employment can be defined as the number of monthly jobs that must be created in the US for the unemployment rate to hold steady. If fewer jobs are created, this will result in a move upwards in the unemployment rate. Conversely, if more jobs are created relative to the breakeven number, the unemployment rate will move lower. If we have an estimate of breakeven employment, we can gauge whether a monthly NFP release is a “good” or “bad” print. 

But much like the neutral rate that the Fed is talking about, the breakeven rate of employment is not readily observable, and it does change over time. In fact, prior to the preliminary benchmark revisions that were published in early September, we were under the assumption that the breakeven rate of employment was ~100K. Now we estimate that it is likely notably below that.  The revisions – which are based on more reliable (but lagged) QCEW data – provide a more accurate estimate of monthly hiring.  Prior to the revisions, most economists were under the impression that  the ~100K average monthly job gains in H1 were sufficient to maintain the 4.2% unemployment rate . Instead, the revisions showed the US job growth slowed well below that number (~30K 3-month-average). Since the unemployment rate remained unchanged despite these revisions, this suggests that the short-run breakeven rate of employment is likely much lower than we initially thought. Our own calculations suggest that the current (short-run) breakeven employment rate is likely at 40k. This is below the range of long-run breakeven range estimates of 70K to 100K by the Federal Reserve Bank of San Francisco in 2024.

We are currently experiencing a short-run breakeven rate that is below the long-run breakeven rate for a few reasons:

1)    A demographic tidal wave – that is, Baby Boomer retirements – means that the working-age population (and therefore, the size of the labor force) is shrinking. 

• We are currently in the midst of peak retirement – the share of the US population that is over the age of 65 is growing at its fastest clip in the 2020s and by 2030 is set to slow. 

• An uptick in retirements means more vacant positions. If this vacancy is filled by a newly hired worker, this does not add a new job created in the nonfarm payroll data, because labor replacement means that on net, zero new jobs have been created. Put another way,  a monthly 100K payroll gain in 2025 is very different from 100K gain in 2022 when immigration was notably higher and retirements were just starting to ramp up. Hiring may be happening beneath the service to offset massive retirements, but this would not be reflected in the monthly NFP reports.

2)     More stringent immigration policy is limiting the ability to offset an aging population.

• Immigration has been used in many countries to blunt the force of an aging population. The recent and more stringent immigration policies implemented at the start of 2025 exacerbate a shrinking labor force due to retirements.

• Should strict immigration policy hold up, we could reach a point where the US labor market is shedding jobs on a monthly basis (that is, negative payroll growth) and the unemployment rate still does not rise. In this instance, so long as the number of employed persons does not shrink faster than the size of the labor force, the unemployment rate will not rise.

3)     College enrollment rates are high – meaning more younger workers remain out of the labor force.

• A decline in college enrollment rates could increase the size of the labor force (though this likely would not move the needle on prime-age participation, since college students tend to be under the age of 25), which would suggest a higher breakeven rate. Conversely, higher college enrollment rates translate to a lower available supply of labor and lower breakeven rates, since full-time students are not available for full-time work.

A labor force with constrained labor supply and lower breakeven employment means that even though we expect job creation in the US to continue to show, monthly NFP numbers need to be assessed through a new lens.

There are a few implications:

A sub-50K NFP print is going to be less bad than it would have been in previous cycles. As we anticipate weakness will broaden in trade-exposed sectors and will likely spillover into a drop in aggregate demand thereafter, this suggests we could see some soft NFP numbers in the months ahead. But context is important, and a lower breakeven rate suggests fewer new jobs are needed each month.

Nonfarm payrolls cannot be used as the same cyclical indicator that they once were. Ambiguity around where breakeven employment now lies (based on uncertainty around actual immigration levels) coupled with employment becoming more acyclical means we can’t rely solely on payroll growth to flag clear labor market turning points. Instead, we must strip out the acyclical job growth and look at growth in cyclically exposed sectors. 

Wage growth is likely going to be stronger moving forward. A labor market that is still structurally tight – despite fewer NFP gains – will put a floor under wage growth, as firms who are hiring compete for a limited supply of labor. We are likely going to continue to see wage growth surpass pre-pandemic labor shortages as we approach peak retirements. 

About the Authors

Mike Reid is a Senior U.S. Economist at RBC. He is responsible for generating RBC’s U.S. economic outlook, providing commentary on macro indicators, and producing written analysis around the economic backdrop.

Carrie Freestone is an economist and a member of the macroeconomic analysis group. She is responsible for examining key economic trends including consumer spending, labour markets, GDP, and inflation.