A perfect storm took a toll on employment in 2025:
Uncertainty soared as tariff announcements accelerated, which caused firms to delay major investment decisions. That included hiring decisions.The premium for job hoppers evaporated as quit rates plummeted. That forced firms to enact hiring freezes, even as overall layoffs remained subdued.Tariffs compressed profit margins, especially in the most tariff-exposed sectors. Manufacturing alone shed 72,000 jobs between May and December.A drop in foreign-born workers limited hiring in immigrant-dependent sectors: the care economy, construction, leisure and hospitality and agriculture.
Those losses had spillover effects. The economic research shows that foreign- and native-born workers function more as compliments instead of substitutes for each other. The loss of immigrant workers takes a toll on entire ecosystems – native-born unemployment rose in areas where deportations were the largest in the 2010s.
Evidence exists that AI added to that weakness, although it gets more credit than it deserves. Research on AI and its toll on employment used the introduction of the first large language model in 2022 as its anchor. That year the market cap of the major tech firms dropped, which prompted layoffs.
Younger workers were more affected than experienced workers as employment faltered. They are the most vulnerable as getting a job is easier if you have one. Newly minted computer programmers and accountants were hit hardest. Experienced workers benefitted.
That begs the question, who are we training to eventually replace them? What skills will be needed as business models shift and new industries emerge?
Many firms cited AI as a reason to implement hiring freezes, cautious about how AI might alter their hiring strategies. AI was a less politically charged excuse than the margin compression due to tariffs or offshoring.
Separately, employment gains became more concentrated and dependent upon one sector. What little we saw in employment gains since May were concentrated in one sector- healthcare and social assistance.
Preliminary census data suggest that revisions to employment in 2025 will be to the downside. The Bureau of Labor Statistics (BLS) has difficulty catching inflection points, especially among small businesses. The data on firm births and deaths is lagged, which means the impact on hiring shows up in revisions.
Measures of uncertainty have come off their peaks but remain elevated. That should alleviate the hesitation to hire, along with clarity on where tariffs will be. Waivers have picked up. The tech firms were awarded the most waivers to fuel what has become an arms race with China in AI and quantum computing.
Add a little fiscal stimulus and the catch-up following the government shutdown, and employment should firm a bit in 2026. Those gains should be enough to stabilize the unemployment rate in the 4.5% range, before its tapers in 2027. (See Chart 2.)
The break-even level of jobs needed to hold the unemployment rate steady has dropped over the last year. Curbs on immigration and rising retirements have diminished the supply of workers who need to find jobs. That is little solace for new grads.
Risks: A surge in layoffs could cause a more consequential rise in unemployment, while a freezing of federal childcare funding poses new risks. Many childcare facilities rely on those funds and will close if the funds are allowed to lapse.
The collateral damage to working parents will be greatest. Our own research reveals that childcare disruptions have risen over 20% since before the pandemic.