The U.S. labor market is undergoing a structural transformation that has little to do with economic cycles or corporate strategy. Instead, it's being driven by a dramatic shift in immigration policy that is fundamentally changing how economists measure and interpret employment data.

According to the Congressional Budget Office, net migration has plummeted by nearly 2.1 million individuals in 2025 compared with 2024—a decline of historic proportions that is only now beginning to show its full effects on the American economy.

The Breakeven Employment Puzzle

For decades, economists have tracked what they call "breakeven employment"—the number of new jobs the economy needs to create each month simply to keep the unemployment rate stable, accounting for population growth and workers entering or leaving the labor force.

In recent years, with robust immigration supporting population growth, that breakeven number hovered around 100,000 to 150,000 jobs per month. But the new immigration reality has dramatically changed that calculation.

"The reduced supply of migrant labor has not lifted participation in the remainder of the population, and as a result breakeven employment could decrease from 50,000 to 15,000 per month."

— Federal Reserve Bank of Kansas City research note

This isn't just an academic observation—it has profound implications for how we interpret monthly jobs reports. The 50,000 jobs added in December, which appeared weak by historical standards, may actually be adequate or even strong when measured against the new, lower breakeven threshold.

What the Numbers Reveal

The scope of the immigration decline is remarkable. According to a Pew Research Center analysis, the total number of foreign-born persons living in the United States dropped by over 1.4 million between January 2025 and July 2025 alone—a decline that accelerated in the second half of the year.

This decline reflects multiple factors:

  • Stricter border enforcement: Unauthorized crossings have dropped significantly under enhanced border security measures
  • Increased deportations: Immigration enforcement has been more aggressive than many economists anticipated
  • Reduced legal immigration: Processing delays and policy changes have slowed legal visa issuance
  • Voluntary departures: An uncertain policy environment has led some migrants to leave or choose not to come

Economic Impact Begins to Materialize

The CBO projects that in 2025, real GDP growth is 0.5 percentage points lower than it would have been, primarily because the negative effects on output from reduced immigration more than offset positive factors in other areas.

The impact is particularly visible in labor-intensive industries that have historically relied on immigrant workers:

  • Construction: Labor shortages are contributing to project delays and cost increases
  • Agriculture: Farmers report difficulty finding workers despite offering higher wages
  • Hospitality: Hotels and restaurants struggle to staff positions, limiting service capacity
  • Healthcare: Long-term care facilities face critical staffing shortages

Wage Effects: A Complex Picture

One of the central questions about immigration policy has always been its effect on wages. The current data suggests a nuanced picture.

Average hourly earnings reached $37.02 in December, up 3.8% from a year earlier—a rate that continues to outpace inflation. Some of this wage growth may reflect reduced labor supply in industries where immigrants previously represented a significant share of the workforce.

However, the CBO notes that through 2026, "the average wage growth of people who are not part of the surge is slightly less than it would have been without the surge because the surge slows the growth of wages of people with 12 or fewer years of education." This suggests that the relationship between immigration and wages is more complex than simple supply-and-demand dynamics would indicate.

The H-1B Restructuring

Beyond enforcement-driven changes, the Trump administration has implemented significant modifications to legal immigration pathways. The Department of Homeland Security announced major changes to the H-1B lottery beginning in March 2026, including a weighting system based on the wage level of the position the worker will hold if selected.

This represents a fundamental shift from the previous random lottery system to one that explicitly favors higher-skilled, higher-paid positions. Employers seeking H-1B workers for entry-level technical positions will face significantly reduced odds of selection, while those offering senior-level compensation will see improved chances.

For technology companies, which have historically been major H-1B users, the changes create both challenges and opportunities. Firms may need to offer higher starting salaries to improve lottery odds, potentially increasing overall labor costs while simultaneously reducing the total number of H-1B workers they can employ.

Second-Half Recovery Expected

Despite the challenges, economists generally expect the labor market to find its footing in the second half of 2026. The CBO projects that the reconciliation act's effects boosting growth will dominate the effects slowing it that stem from reduced immigration.

Additional supporting factors include:

  • Tax cuts from the One Big Beautiful Bill Act providing fiscal stimulus
  • Additional Federal Reserve rate cuts making financing more accessible
  • Reduced policy uncertainty as trade and immigration rules become more established
  • Potential automation investments compensating for labor shortages

What It Means for Workers and Employers

For American workers, particularly those in industries that previously faced significant immigrant competition, the new environment may offer improved bargaining power and wage growth. However, the benefits are not evenly distributed—workers in areas with acute labor shortages may see the biggest gains, while those in sectors where immigration was never a major factor will see little change.

For employers, the message is clear: the era of abundant labor supply is over, at least for now. Companies are being forced to compete more aggressively for workers, invest in automation and productivity improvements, or accept constraints on their ability to grow.

The immigration policy shifts of 2025 and 2026 represent one of the most significant structural changes to the U.S. labor market in decades. Whether viewed as beneficial or harmful—a debate that continues to divide economists and policymakers—there's no question that the effects are real and will shape economic outcomes for years to come.