Structural Labor Constraints: Why the 2025 Job Market Is a Trap for 2026

The central investor question in the current labor market is not about a single trend, but about two concurrent and conflicting forces. On one side, we have cyclical softening, signaled by a rising unemployment rate. On the other, we have structural tightening, evidenced by a halved ratio of job openings to unemployed workers. This dual engine creates a complex and uneven economic landscape.

The cyclical signal is clear. The nationwide unemployment rate rose to 4.6% in November, the highest since early 2017. This uptick, while not yet triggering the formal "Sahm rule" for recession, is a classic indicator of a softening economy. It suggests that demand for labor is cooling, and workers are finding it harder to secure jobs. This is the traditional business cycle narrative.

Yet, this aggregate picture masks a deeper, more persistent structural issue. The labor market's efficiency in matching workers to jobs has deteriorated. The ratio of job openings to unemployed persons has fallen to just under one, half the number that prevailed in the spring of 2022. This isn't just a cyclical dip; it points to a fundamental mismatch. The Beveridge curve analysis reveals this unevenness starkly. While the overall curve has shifted back toward its pre-pandemic position, recovery has been profoundly unequal. Some demographic groups, such as American Indians and Alaska Natives, entered the pandemic with high baseline unemployment and remained behind. This indicates that for certain workers, the path back to employment has been blocked by persistent structural barriers, not just a temporary lack of demand.

The healthcare sector is the clearest example of this structural stress. Employer demand is increasingly concentrated among healthcare fields, with the private education and health services sector seeing employment growth of 2.9%-the strongest of any sector. This is a demand surge driven by demographic forces, but it creates a supply crisis. Not everyone can become a healthcare worker, and the constrained supply of these skilled workers means the sector's growth is squeezing out workers in other industries. This is a classic case of a structural mismatch: high demand in one area, low supply, and workers lacking the necessary training or inclination to fill those roles.

The bottom line is that investors must navigate a market where the cyclical signal (rising unemployment) and the structural signal (shrinking openings ratio) are pulling in different directions. The 4.6% unemployment rate is a warning of economic softness, but the halved job openings ratio is a more enduring concern about the economy's underlying health and its ability to absorb labor. This dual engine suggests a prolonged period of uneven recovery, where some workers and sectors are left behind.

Demographic and Policy Headwinds to Labor Supply

The structural foundation for U.S. labor supply growth is cracking. The primary driver is an irreversible demographic shift. The native-born working-age population, which had been the engine of growth, peaked in 2023 and is projected to decline through at least 2040. Without new immigration, this population would have started to shrink as early as 2012, and our analysis shows that prime-age labor force growth will likely continue to slow and turn negative around 2042. This is a long-term, cyclical inevitability driven by falling birth rates and the aging of the baby boomer generation.

Immigration has historically offset this demographic drag. However, the policy environment is now actively reducing this critical inflow. Net international migration fell sharply in 2025 to 515,000 people, a level insufficient to sustain positive growth in the working-age population. This decline is not just a statistical blip but a policy-driven reduction that is already having an impact. The Congressional Budget Office's January projections for 2025 were revised downward by 0.8 percentage point due to this weaker migration, directly linking policy to a slower-growing labor force.

The most acute risk lies in the potential for even more aggressive enforcement. Current immigration case backlogs and policy uncertainty are already creating friction. If enforcement intensifies to match stated goals, the structural headwind would accelerate. One analysis outlines a severe risk scenario where deportations surge and breakeven employment-the monthly job growth needed just to keep the unemployment rate stable-could fall to a mere 35,000 per month. This is a dramatic compression from the pre-pandemic norm and would fundamentally alter the labor market's dynamics.

The bottom line is a dual squeeze. Demographics are setting a ceiling on labor supply growth that is already being breached, and policy is now actively lowering that ceiling. The result is a labor market where cyclical weakness in hiring demand clashes with a structural tightening of supply. This conflict creates distorted signals for the economy and the Federal Reserve, potentially leading to sticky inflation if the workforce shrinks faster than demand, complicating monetary policy in the year ahead.

The Inflationary and Policy Dilemma

The U.S. labor market is caught in a dangerous feedback loop, one that creates a no-win scenario for monetary policy. On one side, the market is cooling: hiring has slowed, unemployment has risen to a four-year high of 4.6%, and the economy added just 64,000 jobs in November. On the other, wage growth stubbornly remains a full percentage point above pre-pandemic levels. This divergence is the core of the dilemma. It means inflationary pressures persist even as demand weakens, forcing the Federal Reserve into a position where it cannot support the labor market without reigniting price pressures.

The root of this trap is a structural reduction in labor supply. Stricter immigration policies and increased deportations have been more aggressive than anticipated, directly reducing the pool of available workers. This supply shock has not been offset by higher participation from the existing population, creating a fundamental imbalance. The result is a labor market where businesses face rising wage costs to attract scarce talent, even as they are hesitant to hire due to broader economic uncertainty. This dynamic is a classic recipe for wage-price inflation.

The Fed's response is now constrained. Chair Jerome Powell has explicitly stated there is "no risk-free path for policy as we navigate this tension." The central bank must choose between supporting a deteriorating jobs market or controlling inflation. In its most recent move, the Fed chose the former, cutting rates to support employment. However, this decision is precarious. By maintaining a restrictive monetary stance to control inflation, the Fed inadvertently dampens economic demand, which further weakens the labor market. This creates a self-reinforcing cycle: restrictive policy → weaker demand → more job losses → upward pressure on wages → need for restrictive policy.

The situation is further complicated by data reliability. The government shutdown severely hampered data collection, delaying reports and raising questions about the true state of the market. Powell himself suggested the official numbers may understate the problem, estimating the labor market is cooling even more than the data shows. This uncertainty makes policy even more difficult, as the Fed must act on incomplete information.

The bottom line is a policy trap. Restrictive immigration policy reduces labor supply, forcing the Fed to maintain restrictive monetary policy to control inflation. That monetary policy, in turn, further dampens demand and weakens the labor market, which then puts more upward pressure on wages. Breaking this cycle requires either a significant increase in labor supply (through immigration reform) or a willingness to accept higher inflation to support employment-a choice the Fed is currently avoiding. For now, the economy is caught between a rock and a hard place.

Investment Implications and Scenario Weights

The investment case for Bairong hinges on navigating a complex macro backdrop where structural labor market shifts could dramatically alter the Fed's policy calculus. The base case scenario is one of continued cyclical softening, with moderating inflation setting the stage for Federal Reserve rate cuts in 2026. This environment, where the labor market is cooling and wage growth remains elevated, is the most favorable for the company's growth ambitions. It supports the "pay for results" model by keeping financing costs low for enterprise clients and maintaining a steady demand for productivity-enhancing AI solutions.

However, the severe risk scenario is driven by a sharp tightening of immigration policy, which could push breakeven employment down to just 35,000 jobs per month. This would create a powerful, conflicting signal: a smaller workforce could tighten the labor market and keep inflation sticky, strengthening the Fed's case for restrictive policy. For Bairong, this would be a double-edged sword. On one hand, a tighter labor market could increase the perceived value of its AI agents as a substitute for human labor. On the other, restrictive Fed policy would raise the cost of capital for its clients, potentially dampening discretionary spending on new AI pilots and RaaS contracts.

The key catalysts to monitor are the pace of immigration policy implementation, the evolution of wage growth relative to inflation, and the Fed's reaction function. The market's current low valuation multiples reflect a base case that prices in steady, profitable execution. Any deviation toward the severe risk scenario, where structural labor constraints lead to persistent inflation, would likely trigger a sharp repricing of growth stocks and pressure Bairong's margins if clients delay investment.

In practice, investors should watch for three signals. First, the monthly payroll growth figure itself, as it will reveal whether the labor market is cooling due to weak demand or being structurally constrained. Second, the Fed's communications will be critical; any shift in tone toward "sticky inflation" would be a major red flag. Third, Bairong's own financials will be the ultimate test: can it maintain its high gross margin while scaling the RaaS model in a potentially more expensive capital environment? The path forward is binary, and the company's ability to execute its pivot will be judged against a backdrop of shifting macro forces.