Markets Discussion Series Part 8 – Labor Markets: Slowdown or Recession?

August 24, 2025
David R. Kotok
Reading Time: 5 minutes

This morning, we advise readers to take a few minutes to read, in its entirety, a recent research paper from the American Enterprise Institute, titled “Immigration Policy and Its Macroeconomic Effects in the Second Trump Administration.” The following excerpted paragraph provides an overview:

We also estimate the effects on GDP growth in 2025 from the significant slowdown in immigration since 2024. Table 3 shows the effect on real GDP growth in 2025 owing to various factors. The slowdown between 2024 and 2025 in net migration among the civilian noninstitutionalized population age 16 and over from the pace of 2.2 million in 2024 is roughly similar in both scenarios, so the economic effects are similar as well. In the high scenario, net migration among this group slows by 2.1 million (to 130,000 in 2025). In the low scenario, net migration slows by 2.6 million (to −380,000 in 2025). Overall, the immigration path under the high scenario would reduce GDP growth by 0.3 percentage points in 2025 compared with the boost from immigration in 2024, while the low scenario would reduce GDP growth by 0.4 percentage points.
(“Immigration Policy and Its Macroeconomic Effects in the Second Trump Administration,” https://www.aei.org/wp-content/uploads/2025/07/Immigration-Policy-and-Its-Macroeconomic-Effects-in-the-Second-Trump-Administration.pdf?x85095)

Apollo’s Torsten Slok recently summed things up this way:

If 3,000 unauthorized immigrants are deported every day, the labor force will decline by roughly 1 million people in 2025. Lowering the labor force by 1 million will reduce the participation rate by 0.4 percentage points, which will lower the unemployment rate, lower job growth, and increase wage inflation, particularly in the sectors where unauthorized immigrants work—namely construction, agriculture, and leisure & hospitality. In short, deportations are a stagflationary impulse to the economy, resulting in lower employment growth and higher wage inflation. (The Daily Spark, July 12, 2025)

Kotok view

The classic economic formula for GDP growth incorporates the growth or shrinkage of the labor force as a factor. Also included is the change in total factor productivity of that labor force. Productivity is driven by new capital investment and technological innovation.

So why do we expect the US economy to trend down to lower growth? Why do we expect it to produce a stagflationary result?

The productivity gains in the US economy are originating in the AI-supported tech sector, and that sector is expanding in all disciplines. That’s the good news.

However, labor force growth is being damaged by the Trump 2.0 policy of deportation of workers and a more subtle fear-inducing publicity that inhibits immigrants. The result is a projected “zeroing out” of labor force growth. Much harder is to assess is who is not coming to the US. Are they the more creative, more scientific, more imaginative foreigners? The answer appears to be “yes,” from what we can glean by talking with universities and companies. They are now talking off the record because they fear Trump’s retribution if they are public about their concerns. I have had numerous (dozens) of such conversations in the last two months. All have asked to be off the record.

Case study 1

Another factor is early retirement and out-migration of people who are in America legally (citizens) but who are also now afraid. A highly skilled American citizen who has a multidecade career in financial services talked with me on the condition of anonymity. She said,

I have changed where I go and what I do. I have a Spanish name. I’m afraid. All the members of my family are afraid. How do I know I won’t be stopped by a cop, snatched by ICE, and disappear?

Case study 2

This writer gave me permission to quote her, but I have pledged to protect her identity. She wrote,

I NEVER voiced my personal opinions or observations on the XXX platform, but I feel compelled to do that today and tell you about how some of the Mexican/Hispanic population in LA are living: My daughter-in-law was born in Mexico and came to the U.S. when she was 7 with her parents and older sister and younger brother. That was almost 30 years ago. All her family became U.S. Citizens when they arrived. Her mother owns a salon in L.A. and has employed both Hispanic and Caucasians for most of those 30 years. Today she is afraid to go to her shop because she doesn’t speak English well (her husband spoke English clearly, so she didn’t have to speak much, but he has since passed away). She’s afraid that ICE will come to the salon and just arrest everyone because of how they being asked to prove their citizenship. Apparently, the Hispanic community has been witnessing the police and ICE not accepting a driver’s license as citizenship, so they have been told by community leaders to carry their U.S. passport with them at all times. My daughter-in-law, who travels often from Seattle to LA to see her mom, is now afraid that because she looks Mexican, she will be given a hard time by TSA or (God-forbid) ICE but now feels like she must be there more often to speak for her mom in case anyone challenges her citizenship. Can you imagine having to carry your passport around to prove that this is your country? It’s absurd and heartbreaking. Yes, we need to get rid of the bad guys and stop the flow of drugs into our country, but there has to be a more reasonable way to do that. It’s a shame that some citizens have to live in fear or being sent to a prison in South America or to another state, away from their families.

Those of us from the XXXX area know all too well that the Mexican population has been vital to the farming community. I talked to a guy the other day at the XXXX airport. He was speaking quietly to his companion, but I could hear that they were Hispanic. I struck up a conversation with them about the LA situation and my daughter-in-law and her mom. They told me that they were even afraid to speak in public in broken English, for fear of being discriminated against. Very sad. What kind of nation are we now living in? A very stressful time for many, including extended families. That’s all I have to say. Thank you for your time.

Dear readers, maybe the US can overcome no labor force growth with huge productivity gains. But that seems like a very large reach. The basic economics are broken down below. (My source assistant here is Copilot.)

Components of GDP (Expenditure Approach)

GDP itself is commonly calculated using the expenditure approach: GDP=C+I+G+(X−M)GDP=C+I+G+(X−M)

Where:

· C = Consumption

· I = Investment

· G = Government Spending

· X = Exports

· M = Imports

Growth Drivers in Economic Theory

In more advanced macroeconomic models (like the Solow Growth Model), GDP growth is driven by:

· Labor force growth

· Capital accumulation

· Technological progress

Here are the key sources that explain the classic formula for U.S. economic growth using the Solow Growth Model and the more technical Cobb-Douglas production function:

MIT Lecture by Daron Acemoglu
This lecture outlines the Solow Growth Model and its application to U.S. economic data. It presents the aggregate production function as: $ Y(t) = A(t) \cdot K(t)^\alpha \cdot L(t)^{1 – \alpha} $ where growth in output is decomposed into contributions from capital, labor, and total factor productivity (TFP). The lecture also discusses growth accounting and the importance of high-frequency data to avoid bias in estimating factor shares [1].

UC Davis Economics Notes
These notes provide a detailed breakdown of the Solow model, including the steady-state solution and the role of savings, population growth, and technological progress. It emphasizes the Cobb-Douglas function as a foundational tool in neoclassical growth theory[2].

Penpoin Economic Overview
This source offers a clear and accessible explanation of the Solow Growth Model, highlighting how capital accumulation, labor force growth, and technological progress (TFP) interact to drive long-term economic growth. It also explains the diminishing returns to capital and the concept of a “steady state” in economic development [3].

Bottom line: If we don’t grow the labor force, we don’t grow the nation.

We suggest that readers pair this commentary with viewing the video from Camp Kotok about labor force participation and data from BLS and immigration policy. Our moderator is David Sherman, Chief Investment Officer at CrossingBridge Advisors; panelists are Cameron Dawson, Chief Investment Officer at New Edge Wealth; and Jim Bianco, President of Bianco Research. Note discussion about how the stock market is adjusting to jobs data quality deterioration. Thank you to Eric Hale and Greg Jensen for the videography. Here’s the link:

“Macroeconomic Lightning Round – Camp Kotok 2025,”