What's wrong with the job market?

The most recent job market report for January was received with much enthusiasm.  Total jobs in the country increased by 130,000, the highest number since May of last year.  The unemployment rate also fell, however only by one-tenth of one percent.  Still, that was an improvement – although modest – from 2025 when the jobless rate rose from 3.7% to 4.4%.

However, the news wasn’t all good.   Job growth was not widespread.   Most of the job additions – specifically 60% - were in one sector, health care.  Several sectors, including financial services, transportation/information, and the federal government lost jobs. Also, job layoffs were high, wage growth was very slow, long-term unemployment (meaning 27 weeks or more without a job) remained high, and job growth in several previous months was revised downward.

It is important to recognize the job market could be worse.  Job are not declining;  they’re just not rising significantly.   And while the jobless rate is higher than we’d like, it is nowhere near the levels we see during a recession.  It’s also important to note that while North Carolina’s economy continues to be stronger than the national economy, the State has also experienced a slowdown in the creation of new jobs.

What are the reasons for the sluggish job market?   Economists point to three reasons, each of which is creating uncertainly for businesses.  And when a business is uncertain, it usually becomes very cautious about adding new costs through more payroll.

The first generator of uncertainty for businesses is a change we are increasingly hearing, artificial intelligence, or AI for short.  Some economists have called AI the most transformative technology to impact the labor market since the tractor.  The tractor was revolutionary because it reduced the need for labor in agriculture and dramatically increased the efficiency of agriculture, thereby allowing many more people to be fed.  Consequently, not as many farmers were needed.  As a result, a mass migration of farmers occurred from rural areas to cities.  This was just at the time manufacturing was expanding in the cities and requiring workers. 

The distinctive impact of AI is the technology’s effect on both physical labor and cognitive labor.  For example, AI will increase a robot’s capability of performing many human tasks, especially in factories.  But AI will also be used to perform cognitive tasks, like bookkeeping, various kinds of analysis, and even teaching. Millions of workers and businesses will be impacted. 

Businesses know AI usage is spreading, and to be competitive they will need to incorporate it.  But when they will need to make the change, and how extensive the change will need to be, are still uncertain.  This is likely one of the factors behind slow hiring.

A second reason why hiring has slowed is tariffs.  Tariffs are a tax on in-coming imports from foreign countries.   But contrary to what some believe that tariffs are paid by the foreign exporter, in fact they are paid by the US importer.  It’s estimated almost $300 billion in tariffs has was collected from US businesses by the US government in 2025. This is a large new cost for businesses.

Again, tariffs have created more uncertainty for businesses.  The rates have been changed several times.  Higher tariffs have been imposed on some imports, while lower tariffs have been levied on other imports, and more changes can be done quickly. Most importantly, there is a pending Supreme Court decision on whether some of the tariffs are legal.  If the Supreme Court rules that some tariffs are illegal, then the question becomes how the Administration will react and if they could substitute other types of tariffs.  The result leads to more questions and additional uncertainty for businesses.

Lastly is mass deportations.  Currently, estimates suggest almost 3 million individuals have been deported from the country, including those who have self-deported.  Several economic sectors, such as construction and agriculture, have traditionally used foreign laborers.   Deportations have reduced the labor supply for these sectors, even among legal immigrants, thereby curtailing hiring.  Due to the physicality, seasonal work, and relatively low pay, unemployed individuals often don’t consider these jobs.

As long as these three factors remain, the sluggish job market will likely continue.  However, one change could improve the labor market.  This is if the pace of economic growth accelerates.   In recent years the economy has been growing in the 2% to 3% range.  If, as some are predicting, the national economic growth rate could rise to the 4% to 5% range, the need for additional jobs would likely overwhelm the uncertainties and other challenges businesses are now facing.

Some have tagged today’s labor market the “no-fire; no-hire” economy,” meaning businesses want to keep the workers they currently have but don’t want to add new workers. This makes it hard for new workers, like the high school and college graduates we will see in a few months.  I always recommend what I call the KEF approach – knowledge, enthusiasm, and flexibility.  Job seekers should communicate – but not boost – about their skills, they should indicate they are excited about working for the company, and they should let the company know they are flexible with respect to the tasks, hours, pay, and benefits of the job. 

What will it take to improve the job market, and are we headed in that direction?  You decide.

Walden is a William Neal Reynolds Distinguished Professor Emeritus at North Carolina State University.