The Job Market Is Stronger than Recent Data Suggest. The ‘Breakeven’ Point Explains Why.

The unemployment rate rose to 4.3% in August from 4.2% in July, a minimal change reflecting an optimal balance between job demand and worker supply. (Joe Raedle/Getty Images)

Many Americans are concerned about the health of the labor market, and for good reason. Job growth turned negative during the summer, unemployment-insurance claims have been rising, and there are more unemployed people than job openings in the U.S. for the first time since 2021.

Yet these indicators don’t signal a rapid slackening of labor-market conditions, and nor do the Bureau of Labor Statistics’ recent benchmark revisions, which trimmed 911,000 positions from previously reported job gains in the 12 months ended March. That is because the labor supply, or the number of available workers, has slipped in tandem with hiring demand, which means the job market could stay in balance for the foreseeable future.

The key to this balance is the breakeven point of job creation, or the number of new jobs the U.S. economy must create monthly to keep the unemployment rate in check. The breakeven rate was above 125,000 monthly payroll gains in 2023. This year, it is closer to 60,000, says Kathy Bostjanic, chief economist at Nationwide.

This is based on calculations of current labor participation and projected population growth, both of which contribute to labor-force growth. Economists at the Federal Reserve Bank of St. Louis similarly estimated in August that the breakeven point has fallen to a range between 32,000 and 82,000 jobs a month.

Like the neutral rate of interest, or r-starred, or even the concept of maximum employment, the breakeven point isn’t a government data point updated on a regular basis. Instead, it is a framework incorporating the aforementioned variables that economists use to assess the strength or weakness of monthly payroll changes, and the impact of changes in labor supply and demand on the unemployment rate.

The latest reduction is a function, in large part, of diminished supply. Labor supply fell substantially in the past year as more Americans reached retirement age, and as immigration curbs slowed the flow of new workers. U.S. immigration is on pace to stabilize at around 500,000 this year, compared with peak immigration flows of 3.5 million to four million people in 2023, according to Goldman Sachs.

From February through August, immigration authorities arrested just over 930 people a day, according to data collected by the Transactional Records Access Clearinghouse, or TRAC. If the Trump administration reaches its goal of deporting 3,000 a day, the labor supply will decline by about one million people in 2025, writes Torsten Slok, chief economist at Apollo Global Management.

Illegal border crossings also have declined substantially, with less than 25,000 encounters nationwide in July, compared with the 211,500 in July 2023, according to data from the U.S. Customs and Border Protection. That, too, curtailed the flow of new workers into the labor market. The labor-force participation rate among foreign-born Americans was 66.1% in August, down from 67.6% in August 2024.

A breakeven rate of 60,000 suggests the labor market isn’t as weak as payroll data indicate. But employers need to add more than the 22,000 jobs posted in August to keep the unemployment rate from moving up, as it did last month, to 4.3% from 4.2% in July.

The decline in available workers has been a “silver lining” of sorts, Bostjancic says, helping to stabilize the labor market for much of the year. Without such diminished supply, the unemployment rate would have risen to 4.9%, she estimates.

Viewed from the demand side of the equation, the economy doesn’t need an abundance of jobs to stay in balance right now. “Due to an aging population and the plunge in immigration, you don’t need that many jobs to keep the unemployment rate stable,” says Nancy Vanden Houten, lead U.S. economist at Oxford Economics.

Labor supply will likely continue to move lower through the end of the year and into 2026, but the rate of decline is slowing. Vanden Houten expects the breakeven point to be around 52,000 next year, based on Oxford’s projected slowdown in population and labor force growth. She calls the current labor situation a “fragile balance.”

A low breakeven point increases the risk that layoffs would pose to the job market and the economy. The negative consequences of even a moderate uptick in layoffs would be more severe now than in 2023, when more than 190,000 workers were laid off from U.S. tech companies. Because the breakeven point was much higher then, the labor market absorbed many fired workers and the unemployment rate averaged 3.6% for the year.

Most economists aren’t unduly alarmed about the recent rise in jobless claims, which hit the highest level in nearly four years in the week ended Sept. 6. Much of the gain was due to the effect of the Labor Day holiday and unusual activity in Texas.

Continued claims growth has stabilized in recent weeks, and WARN notices—the 60-day notification of planned layoffs required of employers with more than 100 employees—remain range-bound, Vanden Houten says.

A sluggish hiring environment can also be a drag on long-term economic momentum. “Growth in the labor supply is a key component in how fast the economy can grow,” Vanden Houten says.

The Federal Reserve is expected to lower interest rates on Wednesday, and possibly implement additional cuts later this year. Rate cuts could help boost economic conditions and keep the labor market’s soft patch from turning into a more material deterioration.

Tracking the labor market’s breakeven point will provide additional context about employment conditions.

Write to Megan Leonhardt at megan.leonhardt@barrons.com