State-level unemployment insurance data, available during the government shutdown, shows a distinct trend. Initial claims are low (companies aren't laying people off), but continuing claims are elevated (it's hard for the unemployed to find new jobs), confirming a stagnant labor market.
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Companies have already pulled all available levers to manage costs short of layoffs, including halting hiring, cutting hours, and reducing temporary staff. Therefore, the persistently low layoff rate is the last defense holding the economy back from a recession. Any significant increase in layoffs would signal this firewall has broken.
The current labor market is in a state of paralysis, described as a "deer in the headlights" moment. Businesses, facing extreme uncertainty from tariffs and policy shifts, have frozen both hiring and layoffs. This creates a stagnant, low-dynamism environment where both employers and employees are cautiously waiting.
While the headline number of job openings in the JOLTS report appears strong, it's a misleading signal. A record-low quits rate indicates workers are frozen in their jobs and lack confidence in the labor market, painting a picture of stagnation rather than dynamism.
Companies are avoiding layoffs but have exhausted all other cost-cutting measures: slowing hiring to near-zero, cutting hours, and reducing temp staff. This "firewall" against recession is the only thing holding up the labor market, but it leaves businesses with no other levers to pull if demand weakens further.
The current labor market is characterized by both low hiring and low firing rates. While this appears stable, it makes the economy fragile and more vulnerable to negative shocks. Unlike a high-churn environment, there is little buffer to absorb a sudden downturn, increasing the risk of a rapid deterioration.
The long-held belief that companies are "hoarding" labor due to post-pandemic hiring scars is becoming a weaker argument. As economic pessimism grows, the pressure to cut costs should eventually force layoffs, making the continued low layoff rate increasingly puzzling and harder to explain solely by this factor.
Mastercard's Chief Economist argues the labor market is in balance, not collapsing. A slowdown from 175k to ~70k jobs/month is a necessary correction from an unsustainable, post-pandemic surge. With both labor demand (hiring) and supply decreasing, key metrics like the unemployment rate remain stable, indicating equilibrium rather than decline.
AI is a key factor in the current labor market stagnation. Companies are reluctant to hire as they assess AI's long-term impact on staffing needs. At the same time, they are holding onto experienced employees who are crucial for implementing and integrating the new AI technologies, thus suppressing layoffs.
A wave of federal job cuts structured as "deferred resignations" did not spike unemployment insurance (UI) claims because they were classified as voluntary departures, making workers ineligible. This technicality masks the true labor market impact, which instead appears in claims from laid-off private-sector government contractors.
Job seekers use AI to generate resumes en masse, forcing employers to use AI filters to manage the volume. This creates a vicious cycle where more AI is needed to beat the filters, resulting in a "low-hire, low-fire" equilibrium. While activity seems high, actual hiring has stalled, masking a significant economic disruption.
