How Does Labor Supply Impact the Fiscal Outlook?
Labor supply plays a central role in the United States' fiscal outlook and currently stands at a turning point. The number of workers is decreasing due to the aging of the population and declining immigration. These trends shape labor force participation, the underlying population, and ultimately the federal government's ability to fund federal programs.
What Is Labor Supply?
Labor supply — the number of people working or actively looking for work — is one of the fundamental drivers of economic output and, by extension, federal revenues. Labor supply is often examined through the labor force participation (LFP) rate, which measures the percentage of the working age population (people 16 years and over) who are either employed or actively seeking work. That includes people with jobs and those who are unemployed but looking for work, and excludes students, retirees, stay-at-home parents, and discouraged workers who have stopped searching for employment. The rate serves as an effective measure of labor supply because it captures not just how many people have jobs, but also how many are willing and available to work.
Over the past several decades LFP has risen significantly, driven largely by women entering the workforce — their participation rate rose by 27 percentage points between 1948 and 1997. This trend offset the effect of declining participation rates from men which dropped by approximately 12 percent over the same period. As a result, overall LFP rates rose for this period, peaking at 67 percent. Since then, rates have generally declined, reaching roughly 62 percent in 2025.
According to the Economic Policy Institute (EPI), prime-age (25–54 years-old) labor force participation varies significantly across other demographic indicators as well, with notable differences across race, citizenship, and education. For example:
- Across race and gender, Hispanic men show the highest participation rates at 91 percent, while Hispanic women show the lowest at 72 percent.
- Among men, naturalized citizens show higher participation than both native-born citizens and non-citizens. Meanwhile, native-born citizens show the highest participation rates for women.
- College-educated workers participate at substantially higher rates than those without degrees.
Population Changes
While labor force participation rates offer valuable insight into how effectively the existing population engages in the economy, a full understanding of long-run labor supply requires looking beyond participation to the underlying population itself. Though population size alone serves as an uncertain predictor of economic growth and fiscal health, the demographic composition of the population, along with trends in aging, fertility, and immigration shape future labor supply.
The Age Gap
One useful way of capturing how demographic trends have impacted labor supply is by looking at the differences in labor force participation among age groups. While participation rates by both measures have trended upwards over the last few decades due to women entering the workforce, the prime-age LFP rate has been consistently higher than the overall rate. That gap has grown significantly over the past 80 years from 6 percent in 1948 to a historic high of 21 percent in 2025. Shifting education preferences account for some of this divergence, as over the last decade more young people have chosen to pursue higher education before entering the workforce, depressing the overall LFP growth while leaving the prime-age rate less affected, as most students complete their education and join the workforce by the age of 25. However, the dominant driver of those changes is the Baby Boom generation aging out of the workforce in large numbers, pulling the overall participation rate steadily downward.
The growing age gap has real economic consequences extending beyond participation rates. Economists at the National Bureau of Economic Research found that each 10 percent increase the fraction of the population ages 60 and older decreases per-capita GDP by 5.5 percent. The Congressional Budget Office (CBO) projects that the population of people 65 years-old and older will grow from 66 million in 2026 to 87 million by 2056, making it the fastest-growing age group over that period. Over the same period, the population under 24 years-old is expected to shrink from 104 million to 88 million.
Fertility
Underlying the age gap is a longer-run structural challenge. In the United States, not enough children are being born to replace its existing population. The CBO estimates that the total fertility rate (the average number of children a woman is expected to have over her lifetime) peaked at 2.1 births per woman in 2007 and fell to 1.6 in 2024. Furthermore, the agency projects rates to further decline to 1.5 by 2036 — well below the 2.1 replacement threshold where there are enough births to replace the number of deaths. Over time, sustained birth rates below the replacement threshold will mean fewer people entering the workforce as more seniors exit, therefore widening the gap in labor supply.
Immigration
One way economies with declining birth rates can offset labor supply pressure is through immigration, which adds new workers and helps sustain the ratio of workers to retirees. The CBO estimates net immigration fell to just 410,000 people in 2025, down from 3.5 million in 2023. With the declining birth rates, immigration is expected to account for approximately all of U.S. population growth for the next 30 years. The EPI estimates that eliminating net immigration entirely would reduce average annual GDP growth by 0.4 percentage points.
How Labor Supply Affects Federal Revenues
The demographic pressures on labor supply directly impact the federal government's ability to fund itself. Over the last 50 years, income, payroll, and corporate taxes have accounted for an average of 91 percent of federal revenues and that has risen to 93 percent in 2025. Those sources of tax revenue are linked to people’s income, making the tax base almost entirely dependent on a working population. A shrinking workforce means fewer people generating revenues to fund federal programs. That narrows the tax base, potentially forcing higher tax rates or larger deficits.
Demographic pressures are particularly consequential for Social Security and Medicare because they are eligibility-based programs that automatically expand as more people qualify for benefits.
That structure creates a compounding problem when labor supply shrinks from an aging population — tax revenues fall as people retire and leave the workforce while costs simultaneously rise from their enrollment. With fewer workers supporting a growing retiree population, financing those programs becomes increasingly difficult. In part, due to those pressures, Social Security's trust fund is now projected to be depleted in 2032 and Medicare's in 2033 — after which each program could pay only a fraction of scheduled benefits.
Conclusion
The federal budget depends on a working population — people earning wages, paying taxes, and supporting the programs that millions rely on. Understanding how labor supply is changing, what is driving those changes, and what they mean for federal revenues and spending is essential to understanding the country's fiscal outlook.
Image by: Spencer Platt/Getty Images
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