What factors are causing America’s labor force to shrink?

America’s labor market can look healthy if you only watch the headlines. A low unemployment rate, steady hiring in many months, and continued wage pressure in some industries can create the impression that the workforce is basically fine and that any shortages are temporary. But the deeper story is less comforting and more structural. The United States is confronting a labor force that is constrained by demographics, shaped by policy choices, and limited by real-world barriers like health and caregiving. When those forces combine, the result is not just a short-term staffing problem. It is a slower-growing pool of available workers relative to the size of the economy, and that changes how companies expand, where they invest, and what kinds of business models remain viable.

To understand why the labor force is shrinking, it helps to separate two ideas that are often blended together. One is participation, the share of people who are working or actively looking for work. The other is the size and composition of the population itself. A country can have a large population but low participation. It can also have relatively high participation within key working-age groups yet still face an overall labor force that grows slowly or even declines because the population is aging. The United States is moving closer to that second scenario. Prime-age Americans, roughly ages 25 to 54, have shown strong attachment to the labor market in recent years. Yet the overall participation rate remains lower than it was in earlier decades because the population mix has shifted toward older age groups, and older cohorts are less likely to be in the workforce even when they are healthy and financially stable.

The most powerful driver behind a shrinking labor force is aging, and it is the closest thing to an unavoidable input. The baby boom generation is moving through retirement age, and each year that passes increases the share of Americans who are 65 and older relative to those who are in their high-participation working years. When the age distribution changes, labor force math changes with it. Even if everyone behaved exactly as they did before, the country would still end up with fewer workers per capita because more people are in life stages when they are less likely to work full time, less likely to look for work after a layoff, and more likely to exit the workforce permanently. Aging is not a shock that fades with better sentiment. It is a steady demographic tilt that intensifies as larger cohorts pass into older age brackets.

Retirement is the most visible expression of that tilt. The pandemic accelerated retirement decisions for many households, and although some people returned later, the overall wave has been significant. Retirement is often treated as a personal choice influenced by stock markets, inflation, or the availability of flexible work. Those factors matter, but they sit on top of a deeper reality: once a worker exits at older ages, the probability of returning is lower than it is for a younger worker who takes time off. From a company perspective, retirement also creates an uneven loss. Firms do not just lose headcount. They lose institutional memory, mentorship capacity, and the kind of operational judgment that is hard to replace with a quick hire. When many experienced workers leave over a short period, organizations can find themselves with more open roles than they can fill, and less internal capability to train the next cohort at scale.

This retirement dynamic is also difficult to reverse through simple incentives. Higher wages can pull some people back, and some older workers will continue working longer if roles are redesigned and workplaces are more accommodating. But there are limits. A society cannot depend on 60-plus workers behaving like 40-year-olds to solve labor scarcity. Policies that encourage later retirement can move the needle at the margins, yet they cannot fully offset the demographic momentum of a population that is getting older. That is why labor force shrinkage should be treated as a planning assumption rather than a temporary imbalance.

If aging is the fixed driver, immigration is the most important swing factor. In a country with low fertility and rising life expectancy, long-run labor force growth depends heavily on whether new working-age residents arrive in meaningful numbers and remain. Immigration affects labor supply directly by adding workers and indirectly by changing the age profile of the population. It also affects specific sectors more than others. Many industries rely on immigrant labor in roles that are hard to automate and difficult to staff consistently, including agriculture, construction, hospitality, and caregiving. When immigration flows slow or become more uncertain, businesses do not simply face “fewer applicants.” They face higher wage pressure, greater turnover risk, and more fragile service capacity in labor-intensive operations.

Immigration is also uniquely complicated because it is tied to politics and administrative capacity. Even when the economy “needs” more workers, the pathway for work authorization, visa issuance, and legal status can remain constrained. That means companies cannot treat immigration as a stable background trend. It has become an explicit variable in workforce strategy. Firms must make decisions about location, investment, and automation based on a realistic view of how reliably talent can be sourced domestically versus through immigration channels. In this environment, labor force shrinkage is not only about how many people exist. It is also about whether policy allows the labor market to replenish itself fast enough.

Another factor that shrinks the labor force is health, not just in the obvious sense of disability, but in the broader sense of work capacity. Over the past several decades, economists have observed persistent challenges in labor force participation for certain groups, including prime-age men. The causes are debated and multi-layered, but health trends, substance use, and the erosion of stable, well-paying jobs in some regions have all been part of the discussion. The pandemic added a new layer by increasing attention to long-term health conditions that can reduce hours, limit certain types of work, or push people out of the labor market entirely. Even when the number of people affected is not large enough to dominate headline participation, the operational impact can be meaningful for specific industries, especially those that rely on physical labor, long shifts, or inflexible schedules.

Health constraints shrink the labor force in a way that is easy to underestimate because the effect can show up as reduced availability rather than a clean exit. A worker might still be employed but unable to take overtime, unable to work nights, or unable to sustain the pace required in a physically demanding role. Employers then experience a version of labor scarcity that is not captured by headcount alone. The pool of workers who can perform certain jobs, at certain hours, under certain conditions, becomes narrower. That pushes companies toward redesigning work, investing in accommodations and safety, and finding ways to maintain output without depending on an unlimited supply of fully available labor.

Caregiving is another structural constraint that quietly removes labor capacity from the economy. Childcare costs and availability have become a major factor in whether parents, especially women, can work full time or re-enter the workforce after having children. Even when parents want to work, the logistics can make it impractical, particularly if childcare is expensive, unreliable, or incompatible with shift-based schedules. The labor force is affected not only by parents leaving work, but also by parents reducing hours, turning down promotions, or avoiding roles that require travel and unpredictable time demands. The economic cost is spread across households and employers, so it can be easy to ignore until it becomes a bottleneck.

Eldercare is growing into an equally large constraint. As the population ages, more families provide care for older relatives, and that caregiving often falls on people in their prime working years. Unlike childcare, which is usually concentrated in the early years of a child’s life, eldercare can be unpredictable and long-lasting. It may involve medical appointments, crisis events, and daily support that does not fit neatly around a standard workday. When eldercare needs rise, the labor force can shrink through reduced hours and more frequent exits, particularly among workers who lack flexible schedules or supportive workplace policies. At the same time, the care economy itself needs more workers, which increases labor demand in a sector that often struggles with low pay and high burnout. That creates a double squeeze: families need more care, and the system that provides care is itself labor constrained.

Low fertility sits in the background of all these dynamics. The U.S. birth rate has been below replacement for years, and while demographic change unfolds slowly, it eventually shapes the size of the future workforce. Lower fertility means fewer entrants to the labor market decades later, which makes it harder to offset retirement waves and maintain growth without immigration. Societies can adapt to low fertility in different ways, such as through higher productivity, different family policies, and more open immigration. But the fundamental link remains: if fewer children are born, fewer workers enter the labor market later, unless other sources of labor fill the gap.

It is important to emphasize what is not driving the shrinkage, because the wrong diagnosis leads to the wrong solutions. The problem is not mainly that prime-age Americans have collectively decided not to work. Prime-age participation has been relatively strong. That means the easiest pool of “hidden workers” is smaller than many people assume. The remaining gains are more specific and harder to unlock, such as improving labor force attachment for people with disabilities, reducing barriers for caregivers, expanding training pathways for those with limited formal education, and redesigning jobs to accommodate different abilities and life constraints. Those are real opportunities, but they are not quick fixes, and they require targeted investments rather than broad assumptions that people will simply return if conditions improve.

For businesses, a shrinking labor force changes the meaning of growth. In an era of abundant labor, expansion often meant adding headcount. In an era of constraint, expansion increasingly depends on raising output per worker, redesigning operations to be less labor intensive, and building retention as a core capability rather than a human resources afterthought. Companies may need to invest more heavily in automation, not as a trendy initiative but as a structural response to labor scarcity. They may also need to invest in training and internal mobility so that workers can move into higher-value roles without long external hiring cycles. In tight labor conditions, the ability to develop talent becomes a competitive advantage, not a cultural nice-to-have.

Labor force shrinkage also affects where companies choose to operate. Regions with higher participation, more inbound migration, and better care infrastructure become more attractive because they offer more reliable labor supply. Regions that lose population or have persistent health and addiction crises may face deeper labor constraints, higher turnover, and a smaller pipeline of skilled workers. Over time, this can reinforce regional divergence, with growth concentrating in areas that are better positioned to attract and retain working-age residents.

Ultimately, the factors shrinking America’s labor force are not mysterious. They are the predictable result of a population that is aging, a retirement wave that is difficult to reverse at scale, immigration flows that are politically and administratively variable, health constraints that reduce work capacity, and care systems that have not been built to support modern labor participation. Low fertility ensures that these pressures will not disappear quickly. The significance is not just macroeconomic. It is operational. Labor will remain a constraint that shapes corporate strategy, public policy, and the lived reality of households trying to balance work with health and caregiving responsibilities.

The key implication is that America cannot assume its way back to a larger workforce. It must build its way there, through policies that stabilize labor supply, systems that support caregiving, and business models that deliver growth without depending on limitless hiring. Companies that recognize this shift early will focus less on searching for a temporary labor fix and more on designing resilient organizations for a labor constrained future.