A seismic shift in US immigration under the Trump administration is distorting the employment picture, making it challenging for investors and policymakers to accurately assess the labor market. Assuming the administration’s pledge to reduce immigration holds true, the labor supply will shrink, leading to lower economic growth.
In the short term, a smaller pool of workers results in a tighter labor market, keeping unemployment low but artificially so. Figures from May showed employment fell by 696,000 jobs, with nonfarm payrolls rising 139,000 and the unemployment rate remaining steady at 4.2%. However, this trend is likely an anomaly.
Economists argue that Trump’s immigration crackdown may be behind the recent drop in employment. A tighter labor market would normally put upward pressure on wages, but this may not be the case due to a decrease in labor force participation and ‘breakeven’ job growth.
The breakeven rate, which indicates the number of net new jobs needed to maintain a steady unemployment rate, has been steadily declining. Morgan Stanley estimates it will fall to 90,000 by the end of this year and 80,000 next year. Oxford Economics expects the breakeven rate to reach 50,000 jobs per month.
If these projections hold true, monthly employment and job growth could slow without raising the unemployment rate. This would create confusion for policymakers, as the labor market signals suggest a “solid” economy with low unemployment, but the underlying trends may be different.
The uncertainty surrounding immigration net figures will likely lead to significant challenges for the Federal Reserve in communicating policy. A more accurate assessment of the labor market is essential, considering the changing dynamics of immigration under Trump’s administration.
Source: https://www.reuters.com/markets/europe/trump-immigration-crackdown-creates-jobs-distortions-fed-headaches-mcgeever-2025-06-10