Key takeaways
- The U.S. labor market cooled in 2025, with slower hiring, an uptick in unemployment and ongoing business uncertainty.
- Unemployment is expected to peak at 4.5% in 2026 while wage growth stays above pre-pandemic levels.
- The labor market may improve in 2H26 thanks to the prospective impact of tax cuts and Fed rate reductions.
Amid market volatility and immigration reform, the U.S. labor market has continued its multi-year cyclical cooling. Looking to 2026, questions remain about the rate of job growth, the impact of population changes and the effects of policies like the One Big Beautiful Bill Act. Will the labor market continue to loosen?
The labor market in 2025
The market softened slightly in 2025, with hiring cooling for several consecutive quarters. On average, monthly payroll growth in 2025 sat at 50,000 jobs, with a decrease to 29,000 per month from June to August. Meanwhile, the unemployment rate increased 30bps from January to October, and job openings continue to fall.
This slight decline can be partially attributed to business uncertainty, driven by quickly changing trade policies and tariffs. A turn towards protectionism in trade policies drove estimated static tariff rates to 16.5%, up 14 percentage points from the previous year. This equates to a static annual tax of over $500 billion on $3.1 trillion of imported goods. However, as of October, the annualized pace of tariff collections had only climbed to $390 billion, reflecting delays in collection and shifting buyer behavior.
“As a result both long-term and short-term business planning has remained difficult, and layoff and hiring rates have been low,” says Michael Feroli, Chief U.S. Economist at J.P. Morgan. “Businesses are hesitant to make sweeping changes to either grow or shrink their payrolls when they’re unsure what the next six months might hold.”
Additionally, stricter immigration policies and increased deportation have been more aggressive than anticipated. To date 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.
The year did show several positive markers. Despite the weaker job market, wage growth remained a full percentage point higher than pre-pandemic rates. Labor force participation remained steady for workers aged 16-64, who make up 93% of the workforce. Additionally, average hourly earnings growth has accelerated in the back half of 2025, despite rising unemployment.
Average hourly earnings, unemployment rate
Despite rising unemployment, average hourly earnings growth has accelerated in the second half of 2025.
Labor market predictions for 2026
The first half of 2026 will likely deliver uncomfortably slow growth in the labor market, with unemployment peaking at 4.5% in early 2026. The quits rate, or the rate at which people are voluntarily leaving their jobs, is lower than pre-COVID, indicating decreased confidence in finding new roles. The low ratio of job openings to the unemployed reflects this sentiment.
There are two primary factors driving the predicted slowdown. First, as the population changes, decreased labor supply could lead to sluggish growth. This supply challenge comes from increased deportations, an aging population and a significant decrease in visa issuance for workers and students.
Labor force growth assuming current participation rates
Labor force growth has slowed, in part due to an aging population, increased deportations, and fewer visas issues to workers and students.
Additionally, AI and technology may drive increased productivity, but those benefits haven’t been realized yet. So far investment into AI and technology has gone towards equipment, software and data centers, rather than job creation. There are no signs of large-scale job displacement due to AI, and past technological revolutions haven’t tended to drive increases in unemployment. However, jobs with more AI exposure have seen slower job growth, especially among younger workers.
If the labor market performs as expected, the corresponding slowdown in labor income carries risks to the broader economy. GDP for 2026 is expected to stay steady at 1.8%, as will inflation at 2.7%.
Are we in a recession?
“We believe supports are coming together that will arrest this labor market slowdown and revive activity growth later next year.”
Michael Feroli
Chief U.S. economist, J.P. Morgan
The risk of recession in 2026 remains at a one-in-three chance, and the labor market slowdown is expected to reverse course later in the year. This is based on three potential supports for the economy.
- Tariffs: 2025 saw unpredictable, fast-changing tariffs that created market uncertainty; It’s likely that the administration will eventually settle on a more consistent tariff regime in the future.
- Tax benefits: The personal tax provisions of the One Big Beautiful Bill Act will deliver a bump in disposable income in the first half of 2026.
- Rate cuts: the Fed is expected to lower rates in January and May, with a potential for an additional cut in December 2025, which could help to decrease slack in the labor market.
Technology adoption may also deliver upsides. “Usually, it takes several years for general purpose technologies like AI to boost productivity,” says Feroli. “A quicker realization of efficiency gains could lead to stronger GDP growth than expected.”
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