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Most investors think of demographics as a long-term development, not a short-term market mover. But in 2025—and over the next several years—America is more likely to need more workers than jobs unless there is a major economic shock.
The US is facing a demographic tidal wave that will impact a range of economic data in the months and years ahead. This shift will have implications for how we interpret data, how the economy operates, and how policymakers respond.
As part of a series, RBC Economics will explore the different structural forces impacting the US labor market in detail. To start, we outline the five key factors, our high-level views of them, and how these trends will likely play out against cyclical forces in 2025.
Current state of the labor market: A structural story more than a cyclical one
The unemployment rate has remained near the lowest levels in the past 50 years despite the massive uncertainty facing the US economy.
Jobless claims are drifting higher (e.g., layoffs) and there’s a slowdown in hiring (e.g., payroll growth), but we are still below what the Congressional Budget Office considers to be the natural (non-cyclical) rate of unemployment. In fact, the unemployment rate has trended below the natural rate of unemployment since 2017 (even as the natural rate has been declining), not including the pandemic. In our view, this isn’t because the US economy is booming. Instead, the low unemployment rate represents the shortage of available labor, not a demand for workers. Put differently, it tells a structural story and less of a cyclical one.
At the core of this labor shortage is an aging US population. More than 21% of the American population is now over the age of 65, and in the midst of a retirement wave that the US economy never experienced before. This, of course, represents a challenge for employers to find workers to meet their demand for jobs (we expand on this below).
But it also represents a shift in the consumption patterns for the US economy. Consider the spending mentality of someone who loses their job versus someone who retires, and the resulting impact on consumption. What we mean by this is the mentality of income and spending—younger workers who lose their jobs rely on a limited window of jobless benefits for income during periods of unemployment. Conversely, retirees collect Social Security benefits, and can rely on retirement savings (i.e., 401k, pensions, etc.) to sustain their consumption. In fact, the Baby Boomer generation has nearly $75 trillion of wealth. We see that retirement spending providing a tailwind to growth.
Labor market is getting tighter due to aging population
The retired US population has grown to a staggering 52.8 million people in 2025, up from 39.6 million in 2015. What’s even more impressive is the rate of increase continues to rise.
The number of retirements spiked to over 1.7 million in 2025 after averaging about 1.2 million retirements annually between the global financial crisis and the pandemic. The 500,000 difference may not sound like a lot when considering a labor force of 160 million workers, but when considering replacement demand, the recent payroll growth becomes more impressive. Replacement demand simply means the labor demand created when a worker leaves the labor force, which, in this case, is represented by retirements. With 1.7 million retirements per year, nearly 142,000 hires would need to be made every month just for payrolls to breakeven. Put another way, a 150,000 monthly payroll gain in 2025 indicates more hiring by businesses than a 150,000 payroll gain in 2015.
Another metric to consider is the ratio of retirees relative to unemployed new entrants to the labor force (i.e., people looking for their first job). On an annual basis, that ratio was roughly 1-to-1 between 1970 and 2010. However, since 2010, Baby Boomer retirements have pushed the ratio up to nearly 3-to-1. In short, it suggests the odds of unemployed workers finding a job is helped by the number of job openings created by retirements. Interestingly, even when we adjust the job opening rate to account for replacement demand (by excluding retirements and quits), the data suggests new job demand (job creation reflected in payroll growth) remains robust. In contrast, the job creation rate was negative during the GFC.
Currently, at 62.4%, the headline labor force participation rate is historically very low, but not for the prime working age population (aged 25-54)— which is near an all-time high of 83%. This indicates the labor market has likely extracted all the workers it can from the working age population.
Immigration is slowing, and new workers will be harder to find
The most recent trend from Southwest (SW) Land Border Encounters as a proxy for undocumented immigration is staggering—the number of encounters has never been lower.
Looking back at US President Donald Trump’s first term, the number of Southwest US border encounters fell by nearly half from 2016 to 2017, but that was when annual volume was around 600,000. More recently, inflows peaked around 2.5 million annually in 2022 and 2023 and then, slowed notably in 2024 (a drop of about one million). But 2025 is shaping up to see some of the lowest inflows yet as immigration policies discourage people from entering the US.
In the near term, further aggressive constraints or discouragement of immigrants could prolong sector-specific labor shortages (i.e., in agriculture, construction, leisure and hospitality), and cause wage inflation to reaccelerate. In that scenario, we would expect to see job openings stay elevated (and, potentially, start rising again), upward wage pressure, and reduced capacity (notably in the services sector) that could push up prices in order to meet demand.
The supply/demand balances of the labor market will also be tested as foreign-born workers participate in the workforce at higher rates than the native-born population. This would suggest the natural rate of unemployment would need to shift even lower as the equilibrium state of the labor market becomes even tighter than it is now as the supply of foreign workers diminishes. Additionally, longer term impacts for growth could worsen from a declining birth rate and dependency ratio with limited immigration.
We won’t be able to squeeze more workers out of labor force population
There are many reasons for being out of the labor force, but what’s even more pertinent is whether the US can bring more workers back from the sidelines.
We don’t think so. In fact, nearly 94% of people who are out of the labor force report they do not want a job. As noted above, the prime age working population has reached its upper limit, so the ability to find more workers is limited. When you factor in life circumstances—health, family, military, education, etc.—there will always be people who are not available to work at a given time even if they want to. Childcare is one of the most cited reasons for not being able to work, but increasingly families are having to care for aging parents as well. Interestingly, this problem is being compounded by slowing immigration inflows—eldercare is highly reliant on foreign born workers.
Another important and underappreciated cohort among people out of the labor force are persons with disabilities. In 2023, 44% of prime age (25-54) people in the US with a disability were not participating in the labor force. Comparatively, 13% of prime age people without a disability were out of the labor force. Overall, persons with a disability account for 27% of the prime age population who are out of the labor force but make up 10% of the US population. That means of the roughly 102 million people who are currently out of the labor force, about 28 million have a disability that prohibits them from working. Adding that to the 52 million retired workers counted earlier, it leaves about 23 million workers in that cohort before factoring in family care and education considerations. Meanwhile, the most recent number of discouraged workers (those workers who are out of the labor force but want a job) was only 381,000—hardly enough to fill the near 7.3 million job openings in the US labor market.
Skills gap is real and can cause pain in short term
One cyclical force that is working against the current cohort of recent college graduates is a skills gap.
Generally, recent grads align their educational background with job opportunities—nursing majors tend to work in health care, MBAs in finance, and computer science majors in tech. The wave of new entrants looking for jobs is smaller than the cohort of retires leaving the workforce, but what matters more now is the match or mismatch of workers’ skills and skills demanded by job openings.
Geographic mismatches can also play a significant role in the skills gap, and the current state of the housing market is likely contributing significantly to this dynamic. Geographic mismatches can be overcome in relative short order, but a skills mismatch is a much more difficult problem to solve. Consider the time it takes to get training—many jobs require postsecondary education credentials that take anywhere from two to four years to obtain.
That means any shortages we are facing in 2025 are unlikely to be solved by a pipeline of properly trained workers in the next year. For workers, this means accepting jobs that may not align with their education (i.e., they are underemployed), and they may be forced to accept wages below what they otherwise could have commanded. This contributes to some of the trends we are currently seeing—student loan delinquencies are rising, and in turn, that presents a downside risk to consumption.
There’s also another recent trend facing those with the least favorable job outcomes. The cohort without high school diplomas have a 5.7% unemployment rate—among the lowest readings in series history. One reason why is the ability for older workers to remain in service jobs for longer compared to workers in manual labor jobs (i.e., construction, manufacturing, etc.) where workers tend to retire earlier. This means openings created in today’s labor market are benefiting workers who are willing to work in jobs that do not traditionally align with college degrees.
Why does this matter for the US economy
Our long-standing thesis on the labor market has been that retirements are providing a hidden tailwind for the US economy. Not only does it help keep the unemployment rate low, but it represents a fundamental shift in terms of how people behave after leaving a job.
In that lens, we view retirees as a tailwind for consumption (retirees tend to have a lower personal saving rate), spend a greater share of their incomes on services (particularly health care), and spend out of their retirement savings (as opposed to labor income). It means how we’re thinking about the personal saving rate needs to change.
Still, there are risks to this cohort, most prominently the wealth effect. This could disrupt the retirement tailwind in two ways. First, older workers delay retirements as they become more cautious about their nest eggs, reducing replacement demand and job openings for new workers. Second, the retirement saving drawdown by retirees would mean less spending by this increasingly important cohort. The cyclical factors working for or against the big wave of retirements are key to understanding the how the Federal Reserve may react in the months ahead, especially if the labor market shows continued signs of loosening. More broadly, these trends will determine the path of the US economy over the next decade.
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.
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