The Federal Reserve’s analysis of a soft labor market in 2025 reveals supply factors as the primary cause, according to two models examined in a recent report. A statistical VAR model decomposed private employment gains, showing supply forces drove growth from 2022 to 2024, coinciding with immigration inflows. However, employment gains slowed in 2025 alongside decelerating wage growth, with the model attributing this to weakened labor demand. A structural DSGE model further indicated supply shocks—such as a low labor force participation rate and strong productivity—primarily explained the decline in the employment-to-population ratio. While demand-side factors contributed negatively, supply constraints remained dominant. Both models underscore the role of supply-side dynamics, including immigration trends and productivity, in shaping the labor market’s softness.
https://www.federalreserve.gov/econres/notes/feds-notes/model-perspectives-on-supply-and-demand-factors-behind-a-soft-labor-market-20260130.html
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