Why the Job Market Is Deteriorating So Much Right Now

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Everyone recognizes that the job market is losing momentum but it’s hard to find consensus as to why.

• The unemployment rate is creeping higher and job growth is stagnant
• Companies like Amazon and Meta are initiating layoffs and blaming AI-driven productivity increases
• Employees feel less confident about leaving their current roles
• Unemployed Americans are taking longer to find new jobs

The reality is that there’s no single reason creating this cocktail of labor market headwinds.

Instead, there seem to be three forces colliding at once.

1. Pandemic hiring wasn’t built to last

The labor market has been what’s pushing the Federal Reserve to cut rates in 2025, but it’s been cracking ever since the COVID hiring surge started to lose steam.

The number of available job openings exploded to over 12 million at the peak of the boom in 2022, and employees had the upper hand against employers.

At the time, it was easy to job-hop. Companies struggled to retain talent.

But much of that hiring turned out to be temporary, a consequence of overstimulated demand and government stimulus checks.

Once spending patterns normalized, employers realized they had hired ahead of sustainable growth, explaining the recent pullback.

2. The Fed turned off the easy-money in March 2022

The same chart lines up with the Fed’s rate-hiking cycle that started in March 2022.

Rising interest rates forced companies to rethink expansion plans and slow down hiring plans.

Tighter monetary policy marked a turning point for the labor market that had been so employee-friendly.

While the central bank at the time adjusted rates to combat inflation, it also sparked the beginning of a steady, two-year decline in job openings.

3. AI and rising productivity

Versions of the chart below have made rounds on social media over the last week, but as the above two charts illustrate, AI is only one component of a three-legged stool.

It’s true that job openings have fallen off sharply since OpenAI released ChatGPT and kicked off the AI revolution, but that happened in concert with rising rates and a structural labor market retrenchment coming out of the pandemic.

That said, AI tools are nonetheless enabling businesses to increase their output with fewer people — opening the door as both an excuse for layoffs as well as legitimate justification.

What’s more, the new technology is reshaping hiring priorities even for companies that haven’t trimmed headcount.

Over time, it’s possible that meaningful productivity gains from AI work to lower the demand for labor even as economic growth accelerates.