Labor Day: Hiring has stalled

The American labour market reached Labor Day in an uncomfortable state, with hiring largely frozen but few large layoffs. July's weak payroll figure of just 73,000 net new jobs confirmed that companies have more or less stopped adding staff.

The headline was only half the damage. The same report cut the two previous months by a combined 258,000, leaving May and June with gains so small that the three-month average fell to about 35,000. The president responded by firing the commissioner of the Bureau of Labor Statistics, Erika McEntarfer, on the day of release, and has since nominated E.J. Antoni to replace her. The numbers themselves did not change.

Nobody hired, nobody fired

After three years of struggling to find workers, companies are reluctant to make big cuts. They are shrinking headcount through attrition and by closing vacancies they no longer need, without announcing anything. For people looking for work, the hiring rate has fallen to levels normally seen only in deep recessions, even though initial jobless claims remain misleadingly low.

Claims measure the flow of people losing jobs, which is why they look calm. The better gauge of a hiring freeze is continuing claims, which count those still drawing benefits, and these have climbed to their highest since late 2021. The pattern is what a freeze produces: few new entrants to unemployment, but those already there take longer to get out.

Why employers are hoarding

The memory of 2021 and 2022 explains much of the caution. Companies that laid off staff in 2020 spent the following two years paying signing bonuses and higher wages to rehire, and few finance directors want to repeat the exercise. Keeping existing workers through a soft patch looks cheaper than rebuilding a team once demand recovers, as long as the soft patch is short.

Uncertainty about policy has added a second reason to wait. Tariff rates have changed repeatedly since April, with the higher country-by-country rates taking effect only in August, and many businesses cannot price their inputs a quarter ahead. A company unsure of its costs postpones expansion first; cutting staff comes later, and only if sales fall. That sequence is why the freeze shows up in vacancies and hires long before it reaches redundancy notices.

The hiring that does continue is narrow. Health care and social assistance, driven by an ageing population rather than the business cycle, have supplied most of this year's job gains. Manufacturing, the sector tariffs were meant to revive, has been shedding workers, and federal employment has fallen as the administration cut the civil service. Strip out health care and private hiring is close to stalling.

Workers stay put

A frozen hiring market pushes down the rate at which workers quit voluntarily, and it holds back wage growth. Worried about the economy and about rising tariff costs, employees are holding on to the jobs they have, so less labour moves to the more productive parts of the economy.

The cost falls unevenly. Mid-career employees with secure posts lose little beyond the pay rise that a job switch would have brought. New entrants carry most of the burden: school and university leavers, people returning after time away, and anyone laid off by one of the few firms that is cutting. For them the absence of openings means longer searches, lower starting pay and, in some cases, dropping out of the labour force altogether.

Spending follows payrolls

The route from a hiring freeze to weaker demand runs through aggregate labour income: the number of people employed, times hours worked, times pay per hour. With job growth close to zero and wage increases slowing, only hours are left to push that total up, and employers facing uncertain orders tend to trim hours before headcount. Real income growth then depends on inflation staying low, which tariffs make harder.

Households have other supports for a while. Wealthier consumers have large gains in shares and housing to draw on, and they account for a disproportionate share of spending. Those supports matter less further down the income scale, where spending tracks pay cheques closely and where tariff-driven price rises on everyday goods bite hardest. A slowdown in consumption is therefore likely to show up first in discount retailers and consumer credit, well before it appears in the national accounts.

A balance that can tip

Jerome Powell described the situation at Jackson Hole in August as an odd kind of equilibrium, with both the demand for workers and the supply of them slowing at once. Lower immigration has reduced the number of new job-seekers, so weak hiring has not yet pushed the unemployment rate, 4.2 per cent in July, sharply higher. That is the reassuring reading.

The worrying one is that freezes do not last indefinitely. In past downturns a drop in hiring came first and layoffs followed once margins came under pressure. Employers hoarding labour are betting that demand will hold; if tariff costs squeeze profits over the autumn, the same firms may decide attrition is too slow and move to outright cuts. A labour market with so little hiring has no cushion to absorb that shift.

The optimistic case deserves a hearing. Layoffs remain rare, corporate profits have held up, and a Federal Reserve now preparing to cut rates could revive hiring before the freeze turns into firing. Lower borrowing costs would help the rate-sensitive sectors, housing and small business, where hiring has been weakest. Rate cuts work with a lag, however, and they do little for firms whose hesitation comes from tariff uncertainty rather than the price of credit.

Friday's test

The August employment report on 5 September comes first, followed a few days later by the statisticians' preliminary benchmark revision to payrolls for the year to March, which may show that hiring was weaker than reported for longer. After the commissioner's dismissal, markets will also read these releases for signs of interference, although the survey methods have not changed. Continuing claims and the job openings survey will show whether the freeze is deepening. On Labor Day 2025 companies are not firing, but they have stopped hiring, and if the freeze persists consumer spending will probably start to erode over the coming months.