Board of Governors of the Federal Reserve System

May 20, 2026

Population Growth and Labor Market Fragility: Lessons from Domestic and International Experiences

François de Soyres, Johannes Fleck, William Peterman, Avani Pradhan, and David Ratner¹

Labor market indicators such as employment growth and the unemployment rate are commonly used to assess the cyclical position of the economy (NBER Business Cycle Dating Committee). However, deciphering trend from cycle in these indicators is notoriously difficult and can be especially delicate when underlying trends in the economy shift rapidly.² For example, employment growth, in particular, is intimately linked to trend labor force growth. Shifts in trend labor force growth typically happen only gradually and so rapid changes in employment growth usually provide a reliable cyclical signal.

However, recent work by Murray and Vidangos (2026) documents a pronounced slowdown in trend labor force growth which has pushed down the "breakeven" pace of employment growth—the monthly employment increase consistent with a stable unemployment rate—close to zero.³ Thus, even in such an economy that is growing at potential, monthly employment gains will often be negative, which, in historical contexts, would have been widely seen as a sure sign of an economic downturn.

This raises the question of whether slow population growth—accompanied by near-zero employment growth—could render the labor market more cyclically fragile or susceptible to shocks. For example, more frequent episodes of outright employment declines, even if modest, could disproportionately weigh on household and firm sentiment, potentially triggering recessionary dynamics. Given limited precedents of such an environment in the aggregate U.S. economy, this note examines evidence from U.S. state-level experiences across both state and national recessions since 1980, as well as international historical episodes in other countries. Overall, the evidence suggests that labor markets are not systematically more sensitive to recessionary shocks when population and trend labor force growth are low. That said, our evidence does not conclude that the current labor market is on solid footing, rather just that the confluence of low population growth and near-zero employment growth is not by itself necessarily indicative of weakness.

1. State-level Recessionary Experiences

We turn first to examining differences in labor market outcomes across states with different population growth at the onset of recessions since 1980.⁴ In particular, prior to each of the national recessions from 1980 to 2007 (i.e. 1980, 1990, 2001, and 2007), we calculate the lagging three-year population growth rate. We then contrast the labor market experiences for states in the fastest and slowest quintiles of population growth.⁵

Figure 1 establishes two things necessary for the comparison to be relevant for the current U.S. experience. First, the left panel establishes that state-level population growth is indeed closely related to labor force (left set of bars) and employment growth (right set of bars).⁶ In particular, the left panel shows that, in the year before recessions, on average, the slowest-population-growth states (black bars) have very slow labor force growth and payroll employment growth compared to the fastest-growth states (red bars). The roughly 2 percentage point gap in employment growth between the two buckets of states is primarily accounted for by the same gap in population growth (not shown).

Figure 1. Average Labor Force and Payroll Employment Growth before Recessions

The right panel shows that slow-growth states experienced declines in employment in about 40 percent of months, nearly twice the share experienced in the fastest growing states.⁷ Thus, states with the slowest population growth have two characteristics (relative to states with the fastest population growth) that may be expected for the U.S. labor market with slow population growth even with a stable unemployment rate: (i) relatively slow employment growth, and (ii) a higher share of months with negative employment growth.

Turning next to the question of how unemployment dynamics during a business cycle are affected by low labor force growth, Figure 2 plots each group's average unemployment rate change during recessions. Despite experiencing starkly different population, labor force, and employment outcomes, the unemployment rate dynamics are remarkably similar, both before and during the recession.⁸ Thus, it does not appear that states with slower labor force growth at the onset of recessions (black dashed line) experience different recessionary dynamics in the unemployment rate.

Figure 2. Average Unemployment Rates during Recessions

Finally, we turn to the question of whether states with slow population growth are more likely to enter a state-level recession. We start by using the "Sahm rule"—a very accurate historical indicator of a recession at the aggregate level—to define state-level recessions. The Sahm rule is triggered when the three-month moving average of the U.S. unemployment rate rises by 1/2 percentage point or more relative to its low in the previous twelve months. We apply this rule to states to identify state-level recessions. Figure 3 shows that the share of states triggering the Sahm rule is highly correlated with times that the aggregate Sahm rule is triggered (grey shaded regions).

Figure 3. Sahm Rules at the Aggregate and State Levels

Next, Figure 4 plots the share of months that each state is in a recession (according to the Sahm rule) and the state's average population growth from 1979 to 2019. There is no clear evidence that states with slower average population growth are more likely to experience a state-level recession.⁹ However, one caveat is that a rigorous analysis of this question is difficult due to the relative rarity of labor market downturns in isolated states outside of national recessions, which are generally experienced by all states to some extent (apparent from Figure 3). Nevertheless, those few state-level downturns that occurred outside of national recessions do not appear systematically more likely to have occurred in states with slower population growth.

Figure 4. Sahm-rule Share and Population Growth

2. Lessons from International Experience

Next, in order to provide a broader set of comparisons, we turn to evidence from other countries, where episodes of low population growth are more common. We examine this question using three complementary approaches: cross-country comparisons of unemployment volatility and macroeconomic outcomes, a panel analysis of recession episodes within countries, and within-country comparisons of episodes with low population growth relative to other periods. Across these approaches, there is little evidence that lower population growth is associated with greater cyclical fragility as characterized by our metrics. If anything, some specifications suggest that low population growth episodes are associated with smaller increases in unemployment during downturns and modestly lower unemployment volatility.

Cross-Country Comparisons
Looking across OECD countries over the past two decades, there is no meaningful relationship between population growth and key labor market outcomes.¹⁰ Countries with lower population growth do not exhibit higher unemployment volatility (left panel, figure 5). At most, there is a very weak association with a slightly higher frequency of quarters with negative GDP growth, though the relationship is not statistically significant (right panel, figure 5). In any case, unconditional cross-country comparisons are difficult to interpret due to differences in labor market institutions, policy regimes, and broader macroeconomic characteristics across countries.

Figure 5. Cross-section Comparison of Population Growth and Selected Macro Outcomes

Evidence from Recessions (Panel Analysis)
In a more structured approach, we focus on recession episodes in a panel regression setting, relating the change in the unemployment rate during downturns to pre-recession population growth, while controlling for recession characteristics such as duration and severity as well as country fixed effects. This approach helps to isolate the effect of population growth on labor market outcomes from other, country-specific characteristics such as labor market regulations and policy interventions during recessions. As seen in Table 1, lower population growth prior to a recession is associated with smaller, not larger, increases in unemployment. This result holds across a large sample of OECD member economies over several decades and is robust to controlling for additional labor market characteristics such as the OECD's Employment Protection Legislation measure, as well as controlling for the unemployment rate at the onset of the recession.¹¹

Table 1: Panel Estimation across OECD Recessions

Of note, this analysis is reduced-form and should not be interpreted as causal. Our interpretation of this exercise is that we do not find evidence supporting the view that lower population growth is associated with larger increases in the unemployment rate during recessions. That said, additional analysis on how population growth may influence economic dynamics over the business cycle, as well as its relationship with medium-term growth and other macroeconomic variables, could provide further valuable insights.

Within-Country Evidence
While the panel regression approach above exploits variation across recession episodes in many countries, it is also informative to examine whether similar patterns arise within countries over time. To that end, we now compare labor market outcomes across periods of relatively low versus high population growth within each country.

Specifically, for each country in the sample, we divide the historical data into overlapping three-year periods and classify each period as either "low population growth" or "non-low population growth." A period is labeled as low population growth if cumulative population growth over the full three-year window is less than 0.1 percent – effectively capturing episodes of near-zero population change. This procedure partitions each country's experience into two groups that can be compared directly, abstracting from cross-country institutional differences.¹²

Figure 6 reports the results of this exercise. Consistent with the earlier evidence, periods of low population growth are not associated with higher unemployment rates (left panel). Turning to volatility (right panel), the figure shows that in 9 out of 14 countries, unemployment rate volatility is lower during low population growth periods than during other periods (i.e., observations fall below the 45-degree line). This pattern suggests that slower population growth may, if anything, be associated in some cases with slightly more stable unemployment dynamics.

Figure 6. Comparing Low Population Growth Episodes vs. Historical Averages

That said, this evidence should be interpreted with caution. The differences in volatility are generally modest, and the relationship is not uniform across countries. Moreover, some periods may coincide with recessions or other exogenous shocks that independently influence unemployment volatility.¹³

Overall, the within-country evidence aligns with the broader findings of the note: there is little indication that low population growth is systematically associated with greater labor market fragility.

3. Conclusion

In this note, we examined whether the slow trend labor force growth that the U.S. is experiencing could be by itself a sign of labor market fragility. Given that such weak trend labor force growth is unprecedented in recent aggregate U.S. history, we examined the evidence across U.S. states and foreign economies. Overall, the evidence suggests that labor markets are not systematically more sensitive to recessionary shocks when population and trend labor force growth are low. However, because the analysis is reduced form, the results should be interpreted as descriptive associations rather than causal effects. Importantly, this analysis does not conclude that the current labor market is on solid footing, rather just that low population growth and near-zero employment growth are not by themselves necessarily indicative of weakness.

An important caveat is that the source and speed of changes in population growth may matter. For example, the change in U.S. population growth has been driven importantly by immigration dynamics, which have limited parallels in other advanced economies and may evolve more rapidly than in past episodes experienced by other countries (Duzhak, 2024). In particular, the international historical evidence primarily reflects gradual trend declines associated with aging. As a result, the current situation in the U.S. may play out differently from the patterns across U.S. states and foreign countries documented here. More broadly, our note focuses on cyclical dynamics and does not address some crucial longer run implications of slower population growth, including effects on trend output and productivity growth, trend labor reallocation, savings-investment balances, and equilibrium interest rates.

References

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Abraham, K. G., Haltiwanger, J. C., & Rendell, L. E. (2020). "How Tight Is the US Labor Market?" Brookings Papers on Economic Activity, 2020(1), 97-165.

Brave, S., Crust, E., Eusepi, S., Hobijn, B., & Şahin, A. (2026). "Making Sense of Labor Market Indicators Amid Data Imperfections." Brookings Papers on Economic Activity.

Cajner, T., Coglianese, J., & Montes, J. (2025). "The Long-Lived Cyclicality of the Labor Force Participation Rate." Review of Economics and Statistics, 1-47.

Duzhak, E. A. (2024). "Recent Spike in Immigration and Easing Labor Markets." FRBSF Economic Letter, Federal Reserve Bank of San Francisco, 2024(19), 1-6.

Edelberg, W., Veuger, S., & Watson, T. (2026). "Macroeconomic Implications of Immigration Flows in 2025 and 2026: January 2026 Update." Research Note, Brookings Institution, January.

Fleischman, C. A., & Roberts, J. M. (2011). "From Many Series, One Cycle: Improved Estimates of the Business Cycle from a Multivariate Unobserved Components Model."

Foote, C. L., Fujita, S., Michaud, A. M., & Montes, J. (2025). "Assessing Maximum Employment." Federal Reserve Bank of Boston Research Department Working Papers No. 25-9

Murray, S., & Vidangos, I. (2026). "Labor Force Growth, Breakeven Employment, and Potential GDP Growth." FEDS Notes, Board of Governors of the Federal Reserve System, April.

Appendix

A.1 Robustness on the definition of OECD recessions
The analysis presented in Table 1 uses a country-specific OECD indicator to identify recessions dates. Table A1, instead, uses a more conventional definition to identify recessions – a minimum of two consecutive quarters of negative GDP growth. Results are little changed.

Table A1: Panel Estimation across GDP-based Recessions

A.2 Robustness on the Employment Legislation Protection metric
In the main text, Table 1 reports the results of the baseline panel regression specification. In columns (4) and (5), we control for a time-varying measure of labor market rigidity from the OECD—specifically, the Employment Protection Legislation (EPL) index. In these specifications, the EPL measure captures protection of regular workers against dismissal. Here, we instead use the EPL indicator for the protection of temporary workers. As shown in Table A2, the results remain little changed: lower population growth continues to be associated with a smaller increase in the unemployment rate during downturns.

Table A2: Panel Estimation across OECD Recessions with Alternative Employment Protection Legislation Measure

A.3 Number of low population growth episodes

Table A3: Population Growth Episodes by Country