The Dispatch15%
A Smaller Labor Force Means a Smaller Economy 8%
By Stan Veuger0%
7/15/2026, 6:45:00 AM
BS Summary: This article contains 12 faulty reasoning types, including Pessimism Bias, Recency Bias, and Framing Effect, with Hasty Generalization as the most egregious example at 12.9% saturation with 168 hits. Analysis detected 686 faulty-reasoning hits from 1,300 analyzed words, generating a BS Score of 24.5% and a BS Rank of 8% (15,010 of 16,256 articles). This article is better (less manipulative) than 92.30% of the article peer group.
In 2024, the U.S. fertility rate reached a new low of 1.6.
Net immigration started declining rapidly that same year and quite possibly turned negative in 2025.
This combination of factors has brought the rate of population growth to a historic low, a development with major economic implications.
Perhaps the most obvious consequence is lower overall output growth.
Economic growth can come only from an increase in the labor force or more output per worker.
In the U.S., the latter has averaged about 2 percent annually over the past century, with variation that does not correlate in an immediately obvious way with labor force growth.
It is therefore reasonable to expect a slowdown in labor-force growth to translate directly into slower economic growth.
If labor force growth goes from 1 percent per year to 0 percent, we can expect economic growth to go from 3 percent to 2 percent.
Over time, this adds up to a much smaller aggregate economy, likely accompanied by lower interest rates.
And U.S. labor force growth has in fact come down in tandem with population growth.
In 2023, the Bureau of Labor Statistics projected that population growth would average 0.6 percent between 2023 and 2033, while the labor force would grow at an annual rate of 0.4 percent.
Compare that to the 1960s and 1970s, when population growth was around 1.8 percent and labor force growth topped 2 percent annually.
The Congressional Budget Office projects that deaths will start to exceed births in 2030, and it assumes that net migration will be high enough to offset this natural population decrease until well into the 2050s.
Without positive net migration, though, the total population would start to shrink around the end of President Donald Trump’s second term.
If anything, the BLS and CBO projections, like other such efforts, are overly optimistic.
They typically assume that fertility rates will plateau just below where we are today, or even at a higher level, even as other countries have seen fertility fall to meaningfully lower levels.
And they count on persistently positive net migration, even though we are close to zero today, with little prospect of increases in at least the coming two years.
Very few people are crossing the southern border these days, and the Trump administration has restricted immigration through practically all legal pathways as well.
One will sometimes hear from immigration skeptics that overall GDP growth does not matter, just GDP per capita, because that is what determines the well-being of the native-born.
That is not true.
Most importantly, overall GDP growth is crucial to the national defense and our geopolitical position.
If only GDP per capita mattered, geopolitical competition with China would be the least of our concerns, and the continent of Europe would be under the iron-fisted control of Grand Duke Guillaume V of Luxembourg.
A second set of macroeconomic consequences of the population slowdown is best understood through the lens of real interest rates.
This issue received significant attention prior to the COVID-19 pandemic, when some economists viewed slowing population growth as a key driver of so-called secular stagnation.
Under this view, slower population growth reduces the demand for new capital goods—a smaller workforce will need fewer factories and vehicles, less real estate and equipment—which places downward pressure on interest rates.
This effect is reinforced by a reduction in the marginal returns to capital from increased capital per (remaining) worker.
In simple terms: An understaffed factory is less productive, a restaurant needs waiters, cars do not quite drive themselves yet, a house no one wants to live in is worse than useless.
Through this channel, lower population growth reduces rates of return throughout the economy.
Downward pressures on rates are further amplified by the effects of aging, which is generally seen as increasing savings as people expect to spend more time in retirement.
This increases the supply of loanable funds, which reduces the cost of borrowing.
Commentators will point to Japan’s persistent low-interest rate environment as evidence for the idea that borrowing is cheap in an aging, shrinking society.
That said, there is more ambiguity around the impact of the population growth slowdown on interest rates than around the impact on output growth.
Perhaps the most important force that pushes in the opposite direction comes from the government’s need to finance its spending.
As population growth slows, fewer people become responsible for bearing the burden of the national debt and the cost of providing public goods like national defense.
This makes Treasury bonds riskier, pushing up interest rates.
Higher interest rates, in turn, raise future deficits.
This mechanism also interacts with the consequences of aging.
As smaller cohorts enter the labor force, the economics of programs like Social Security and Medicare change.
With fewer workers per beneficiary, they become harder to finance.
This means reduced benefits (politically impossible), higher taxes (implausible), or larger deficits (definitely).
Relying heavily on the final option will again push up interest rates.
Policymakers can respond to the population growth slowdown in numerous potentially productive ways.
They can try to increase fertility rates (or slow down their decrease), though efforts in that area have, at best, a mixed record.
As a recent paper put it: “[T]he clear-cut bottom line is that whatever impacts pro-natal policies and broader changes might have caused, none has caused low birth rates to reverse enduringly back to replacement levels.”
Of course, raising fertility rates will not pay off, in economic terms, for decades.
While currently not in the cards, the U.S. could also admit more immigrants (and let more of those already here stay).
That approach has direct positive consequences for growth and the fiscal outlook.
Immigrants typically have a more positive fiscal impact than comparable natives, as immigrants often arrive after they have completed their K-12 schooling and are not eligible for many welfare and social insurance programs, at least not immediately.
Skepticism of this positive impact is often driven by data from Europe, where the numbers look quite different because of differing immigrant selection, more generous welfare states, and steeper barriers to labor market integration.
In addition, immigrants bear part of the burden for the existing federal debt and future unfunded liabilities, which makes their impact on the fiscal outlook even more positive.
Where immigrants are less helpful—because they too age out of the labor force—is in keeping old-age pension and health care programs sustainable.
Those programs can of course be addressed directly.
Doing so is straightforward on a technocratic level but seemingly impossible politically.
The best reform proposals pay a triple dividend: Not only do they reduce the cost of the programs themselves, they reduce the tax burden on younger workers while strengthening the incentives of older workers to stay in the labor force longer.
Finally, we can try to increase output per worker.
Some have argued that a scarcity of young workers leads to the development of new labor-saving technologies that can offset the growth slowdown entirely.
A more mainstream view is that fewer people will come up with fewer new ideas and productivity will rise more slowly.
Regardless of which of these two scenarios you believe to be correct, the government can contribute to efforts to raise productivity by investing in science, letting people build housing in productive parts of the country, reducing trade barriers, allowing for data center construction, ensuring that firms have access to cheap and reliable energy, and making policy in ways that are transparent and predictable.
Slower population growth appears to be here to stay.
Policymakers can avoid some of the harmful consequences by keeping America attractive to immigrants, adjusting our entitlement programs to new demographic realities, and working to raise productivity levels.
But absent a genuine AI revolution, a future of slower economic growth is likely.
Analysis
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