Weak June Hiring and Smaller Workforce Could Reignite Fed Debate on Labor Market

U.S. job growth slowed more than expected in June, adding 57,000 jobs, while earlier employment estimates for April and May were revised lower. Although the unemployment rate edged down to 4.2% from 4.3%, the decline was largely linked to fewer people participating in the labor force rather than stronger hiring.

The labor force contracted by roughly 700,000 people during June. Since President Donald Trump returned to office, the workforce has declined by about 1.3 million people, and around 1.5 million fewer people were employed in June compared with January 2025.

Economists say this combination of weaker hiring and a shrinking labor force makes it more difficult for the U.S. Federal Reserve to assess the strength of the labor market. While a lower unemployment rate typically signals resilience, a declining number of workers may point to slower economic growth ahead.

Glassdoor Chief Economist Daniel Zhao said the lower unemployment rate reflected people leaving the workforce rather than an increase in hiring, suggesting the labor market has yet to regain stronger momentum.

Before the employment report was released, San Francisco Fed President Mary Daly said policymakers should remain cautious because economic growth could weaken if investment slows. She noted that uncertainty surrounding inflation and growth supports waiting before making interest-rate decisions. Financial markets reduced expectations for higher borrowing costs following the latest jobs report.

The June employment figures may also be revised in the coming months, as that reporting period has historically seen significant adjustments. Earlier revisions had already lowered April and May job gains by a combined 74,000 jobs.

Federal Reserve officials may also revisit discussions about how immigration trends and labor force participation affect long-term economic growth. Fed Chair Kevin Warsh has expressed optimism about productivity improvements driven by artificial intelligence but has also noted that total hours worked have remained relatively unchanged. He said it is still too early to determine how those trends should influence monetary policy.