US Faces Economic Risks from Shrinking Workforce Participation

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The United States is approaching a critical economic juncture as workforce participation trends show signs of stagnation and potential decline. Policy shifts aimed at tightening labor market regulations and streamlining national workforce priorities could inadvertently reduce the available pool of labor, posing risks to key economic sectors.

According to a recent analysis by the American Enterprise Institute (AEI), the labor market could see a net loss of up to 525,000 working-age individuals in fiscal year 2025. This follows a high of 1.3 million new entrants into the workforce in 2024, according to Census Bureau estimates. If the forecast holds, the country may face the first year of negative workforce growth in decades.

Currently, nearly one-fifth of the U.S. labor force comes from non-traditional sources of labor supply, according to data from the Department of Labor. A contraction of this size could reduce GDP growth by as much as 0.4% this year, the AEI study estimates. A separate projection from the Federal Reserve Bank of Dallas puts potential GDP loss at closer to 0.75% to 1.0%.

“The tightening of workforce channels will ripple across nearly every sector,” said economist Madeline Zavodny, co-author of the Dallas Fed study, in a statement to Newsweek. “The size of the labor force is shrinking, which will suppress consumer spending and broader economic expansion.”

These challenges are intensified by the nation’s ongoing demographic shift. The U.S. birth rate remains below replacement level, and the population of working-age Americans is gradually declining. Zavodny added, “The sectors most dependent on consistent workforce growth, such as agriculture, construction, and healthcare, will struggle to meet labor demands without a stable pipeline of workers.”

Despite the projections, the administration remains firm in its direction. White House spokeswoman Abigail Jackson told Newsweek, “President Trump’s policies are designed to safeguard opportunities for American workers and ensure that taxpayer resources support our citizens. These efforts lay the foundation for a more self-reliant economy.”

Still, some economists warn of unintended consequences. Giovanni Peri, a labor market expert at the University of California, Davis, said industries such as hospitality, construction, and farming are likely to face the sharpest labor shortfalls. “These sectors have traditionally relied on labor pools that are no longer replenishing,” he noted. “This gap will translate to higher consumer prices and possible disruptions in service delivery.”

Small businesses may be particularly exposed. Zavodny noted that many smaller firms struggle to access short-term labor solutions, leaving them vulnerable to supply chain and staffing challenges. “Without reliable access to workers, they could see both their workforce and their customer base shrink,” she said. The American Immigration Council, in an economic assessment, previously estimated that a significant portion of national consumer spending and rental income is tied to broad labor participation across various communities. A retreat from these levels could pressure revenue streams and accelerate layoffs in vulnerable sectors.

Even as economic warnings mount, the administration remains focused on enforcing existing workforce policies. The recently passed GOP-backed reconciliation bill sets aside $150 billion for labor compliance and enforcement mechanisms. Asked if economic conditions might alter the current course, AEI senior fellow Stan Veuger was skeptical: “It appears the administration is committed to its policy goals, regardless of short-term economic fallout.”

As the U.S. economy adapts to changing labor dynamics, the coming months will test whether policy efforts to protect domestic employment will usher in a new era of stability or lead to unexpected challenges in sustaining growth.