What the Labor Market Is Really Telling Us in 2026

A 10–20 page research brief grounded in primary labor market data and cautious interpretation.

Contents

• Executive summary

• Key indicators dashboard

• 1) Hiring and payroll momentum

• 2) Unemployment, underemployment, and duration

• 3) Labor demand and churn (JOLTS)

• 4) Wages, inflation, and productivity

• 5) Sectoral and compositional shifts

• 6) Labor supply: participation, demographics, and constraints

• 7) The macro backdrop: rates, demand, and the “soft landing” test

• 8) 2026 outlook: baseline plus scenarios and trigger indicators

• 9) Implications for employers, workers, and policymakers

• Appendices: definitions, data caveats, references

Executive summary

If you only read one thing: the 2026 labor market story is a cooling cycle with uneven stress, not a clean break. The evidence suggests labor demand has normalized through fewer openings and slower hiring—while layoffs remain relatively contained—yet some household measures are flashing that matching is getting harder.

• Cooling is visible in payroll momentum. Payroll employment rose by 50,000 in December 2025, and the BLS reported that job gains in 2025 averaged 49,000 per month versus 168,000 in 2024.

• Unemployment is drifting higher, not surging. The unemployment rate was 4.4% in December 2025—still low by long-run standards, but high enough that year-over-year changes matter.

• Hidden slack is rising. The number of people working part time for economic reasons was about 5.3 million in December 2025, and the long-term unemployed accounted for 26% of unemployed people.

• Demand is rebalancing through lower churn. JOLTS shows job openings around 7.1 million, quits at 3.2 million (2.0% rate), and layoffs/discharges at 1.7 million (1.1% rate) in November 2025.

• Wage growth is moderating alongside inflation. Average hourly earnings rose 3.8% year over year in December 2025; CPI inflation was 2.7% year over year in December.

• Productivity is the swing factor. In Q3 2025, BLS reported nonfarm business productivity up at a 4.9% annual rate and unit labor costs down at a 1.9% annual rate—helpful if sustained, but not guaranteed.

The key interpretive move is to treat the labor market as a system: payrolls (net jobs), unemployment (slack), job openings (demand), quits/layoffs (churn), participation (supply), and wages/inflation/productivity (price pressures and living standards). In 2026, the labor market is telling us that the system is normalizing—but that normalization is not evenly distributed.

Key indicators dashboard

Latest available readings from official releases (see References).

Data caveat: Some October–November 2025 series were disrupted by the 2025 lapse in appropriations. For example, CPI notes that October/November values were not available and that missing values were imputed; the Employment Situation release also notes household survey collection impacts for October 2025.

1) Hiring and payroll momentum

The cleanest headline for late 2025 is that the labor market slowed a lot. That doesn’t automatically mean the labor market is weak—rapid job growth is common in early recoveries and tends to slow in mature expansions. But the speed of deceleration matters for risk in 2026.

In the BLS Establishment Survey, total nonfarm payroll employment rose by 50,000 in December 2025. The BLS also noted that 2025 payroll employment increased by 584,000 (an average of 49,000 per month), well below 2024’s 2.0 million (an average of 168,000 per month).

In a low-growth regime, month-to-month volatility becomes a bigger deal. A single month’s payroll number can be distorted by weather, strikes, seasonal adjustment quirks, or later revisions. For 2026, the higher-value approach is to track 3–6 month averages and cross-check them against JOLTS hires and unemployment trends.

A useful mental model

Think of payroll growth as the “net” of a much larger churn engine. Each month the economy has millions of hires and separations; net job creation is the small difference between them. When net gains shrink, the difference could be caused by fewer hires, more separations, or both. JOLTS helps separate those channels.

What would change the narrative

• Persistent sub-100k payroll prints combined with a rising unemployment rate would indicate that the slowdown is not just “normalization.”

• Falling average weekly hours is often an early “margin” adjustment employers make before layoffs.

• Broadening weakness across sectors (beyond a few categories) would signal a macro demand issue.

Unemployment, underemployment, and duration

Unemployment is still relatively low, but the composition of unemployment is getting more important. In December 2025 the unemployment rate (U-3) stood at 4.4%, while labor force participation was 62.4% and the employment-population ratio was 59.7%.

Two metrics suggest that the “average” worker experience may be less tight than the unemployment rate alone implies:

• Involuntary part-time work: People working part time for economic reasons were about 5.3 million in December 2025.

• Long-term unemployment: The long-term unemployed accounted for 26% of unemployed people, up year over year.

These matter because they often move earlier than the unemployment rate when a market cools. Hours cuts and longer job searches can spread quietly while payroll growth looks “fine.”

A practical reading for 2026

If unemployment rises while participation rises, that can reflect a healthy expansion pulling people back into the labor force. If unemployment rises while part-time for economic reasons and long-term unemployment rise too, that’s a more cautionary signal: it implies the economy is not only slowing—it is creating less effective matching between workers and jobs.

Trigger indicators

• Duration spike: A sustained increase in the share unemployed 27+ weeks typically signals deteriorating job-finding.

• Hours compression: A drop in average weekly hours (especially in cyclical sectors) can precede layoffs.

• U-6 underemployment: If broader underemployment rises faster than U-3, slack is increasing beneath the headline.

3) Labor demand and churn (JOLTS)

JOLTS is the best high-level window into the labor market’s internal mechanics: openings (demand), hires (matching), and separations (churn). In November 2025, BLS reported job openings little changed at 7.1 million. Hires and total separations were each 5.1 million.

Quits were 3.2 million (a 2.0% rate), and layoffs/discharges were 1.7 million (a 1.1% rate). The pattern is consistent with a market that is cooling primarily through lower churn and fewer opportunities—not through widespread layoffs.

What “cooling through churn” means

When quits fall, it often means workers feel less confident about finding a better job quickly. That reduces wage pressure, but it can also reduce dynamism (fewer job-to-job moves). In a soft landing, openings and quits fall while layoffs stay relatively stable.

What would be worrying

• Layoffs rate rising meaningfully above recent levels across multiple industries. • Hires declining while layoffs rise—this is the classic downturn combo.

• Openings collapsing quickly (a demand shock) rather than drifting down.

4) Wages, inflation, and productivity

In 2026, a key question is whether the U.S. can sustain good employment outcomes without reigniting inflation. That requires some combination of: (1) moderate wage growth, (2) improving productivity, and (3) a stable labor supply.

Wages: In December 2025, average hourly earnings for all employees on private nonfarm payrolls rose to $37.02, up 3.8% over the year. AHE is timely but can be influenced by job mix.

A more composition-controlled wage measure, the Employment Cost Index, reported that wages and salaries increased 3.6% over the 12 months ending September 2025 (private industry), and inflation-adjusted wages and salaries increased 0.6% over the year.

Inflation: CPI inflation (all items) was 2.7% year over year in December 2025, with core CPI (less food and energy) up 2.6%.

Productivity: In Q3 2025, BLS reported labor productivity up at a 4.9% annual rate and unit labor costs down at a 1.9% annual rate. If productivity remains stronger than pre-pandemic norms, it can make the wage–inflation tradeoff far easier in 2026.

What to watch

• ECI vs CPI: If ECI stays near 3–4% while CPI stays near 2–3%, real wage growth becomes positive and sustainable.

• Productivity trend: Two or three strong quarters matter more than one.

• Services inflation: Labor-intensive categories are sensitive to wage dynamics.

5) Sectoral and compositional shifts

Even when the overall labor market is stable, it can be sharply uneven by sector. December 2025 payroll changes illustrate this: some service categories continued to add jobs, while other areas were flat or down.

Why composition matters: if job growth is concentrated in a handful of sectors (for example, health care), the headline number can mask weakness elsewhere. For planning, the relevant labor market is your sector and occupation, not the national average.

2026 takeaway

Expect continued divergence: resilient services hiring alongside slower hiring or restructuring in rate-sensitive and certain white-collar segments. This is consistent with a late-cycle normalization where aggregate outcomes look “okay,” but local experiences vary.

6) Labor supply: participation, demographics, and constraints

A key reason the labor market can cool without collapsing is labor supply. If more people enter or re-enter the workforce, employers can fill roles without bidding wages up as much. In December 2025, the labor force participation rate was 62.4% and the employment-population ratio was 59.7%, both little changed over the year.

Participation is shaped by demographics (aging), caregiving constraints, immigration flows, health, and the attractiveness of wages relative to the cost of living. Even small changes in participation can matter because the U.S. labor force is large; a 0.1 percentage point change can represent hundreds of thousands of people.

Where supply constraints can reappear

• Specialized healthcare and skilled trades: training pipelines and licensing can limit supply even in cooler macro conditions.

• High-skill technical roles: demand is volatile, but supply is also constrained by experience requirements.

• Local markets: housing costs and migration patterns can make some metros structurally tighter.

7) The macro backdrop: rates, demand, and the “soft landing” test

Labor markets don’t move in isolation. Financial conditions—especially interest rates—shape demand for housing, durable goods, and investment. A simple but useful rule is: when demand slows, hiring slows; when hiring slows enough, unemployment rises.

The 2025–2026 question is whether cooling demand continues to work through openings and hiring (soft landing), or whether it spills over into layoffs (hard landing). The inflation backdrop matters because it constrains how aggressively policymakers can support employment.

The CPI and wage data point toward disinflation and moderating labor cost growth—conditions that, in principle, give policymakers room to prioritize the labor market if needed.

8) 2026 outlook: baseline, scenarios, and trigger indicators

The Fed’s December 2025 SEP median projection places unemployment at 4.4% in 2026 (Q4 average) with real GDP growth at 2.3%. That is a classic soft-landing baseline: slower growth, stable labor conditions.

Scenario A: soft landing continues

Openings and quits drift lower, payroll growth remains modest but positive, and unemployment stays around the mid-4% range. Inflation continues to trend near the Fed’s comfort zone, allowing rates to ease gradually without destabilizing prices.

Scenario B: hiring freeze turns into layoffs

If business confidence weakens and revenue growth stalls, firms may shift from slowing hiring to cutting headcount. This scenario would likely show up first in JOLTS (lower hires, higher layoffs) and household measures (rising part-time for economic reasons, longer unemployment duration).

Scenario C: re-tightening pockets

If productivity surprises to the upside and demand remains resilient, the aggregate labor market could stay stable while specific skill markets tighten again. This would look like localized wage pressure and renewed churn in targeted occupations rather than broad inflation.

Trigger indicators checklist

• Layoffs rate: sustained move up.

• Hires rate: sustained move down.

• Part-time for economic reasons: sustained move up.

• Long-term unemployment share: sustained move up.

• Average weekly hours: sustained move down.

9) Implications for decision-makers

For employers

• Plan for a cooler hiring environment. Expect fewer candidates to job-hop, but do not assume all labor markets are loose.

• Use churn metrics internally. Track quits, time-to-fill, and wage drift by role—your internal “JOLTS.”

• Focus on productivity. In a slow-growth environment, productivity gains protect margins without layoffs.

For workers

• Mobility is more selective. The easiest moves will be toward sectors still hiring steadily (e.g., many healthcare roles).

• Signal strength matters. Credentials, portfolios, and measurable impact help in a lower-churn market.

For policymakers and analysts

• Watch underemployment and duration. They can deteriorate before unemployment spikes.

• Interpret data with caution where collection gaps exist. Shutdown-related disruptions can affect month-to-month readings.

• Productivity is central. If productivity stays elevated, the economy can support stronger real wage growth with less inflation risk.

Appendix A: definitions (quick)

• U-3: Headline unemployment rate (unemployed / labor force).

• U-6: Broader underemployment measure (includes marginally attached workers and part-time for economic reasons).

• JOLTS openings: Positions open on the last business day of the month.

• Quits rate: Quits as a share of employment; proxy for worker confidence and bargaining power.

• Employment Cost Index: Wage/compensation measure that controls for job composition.

• Unit labor costs: Labor costs relative to output; key link between wages and inflation.

Appendix B: references (selected)

• U.S. Bureau of Labor Statistics. The Employment Situation — December 2025 (released Jan 2026). https://www.bls.gov/news.release/pdf/empsit.pdf

• U.S. Bureau of Labor Statistics. Job Openings and Labor Turnover — November 2025 (released Jan 7, 2026). https://www.bls.gov/news.release/pdf/jolts.pdf

• U.S. Bureau of Labor Statistics. Consumer Price Index — December 2025 (released Jan 13, 2026). https://www.bls.gov/news.release/pdf/cpi.pdf

• U.S. Bureau of Labor Statistics. Employment Cost Index — September 2025 (released Dec 10, 2025). https://www.bls.gov/news.release/pdf/eci.pdf

• U.S. Bureau of Labor Statistics. Productivity and Costs — Third Quarter 2025 (Preliminary) (released Jan 8, 2026). https://www.bls.gov/news.release/pdf/prod2.pdf

• Board of Governors of the Federal Reserve System. Summary of Economic Projections (Dec 10, 2025). https://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20251210.pdf

• Federal Reserve Bank of Atlanta. Wage Growth Tracker (Jan 15, 2026 update). https://www.atlantafed.org/chcs/feature/2026/01/15/wage-growth-tracker

• Reuters. “Fed to cut rates slightly this year, CBO forecasts” (Jan 8, 2026). Note: Where primary sources were not directly accessible in the research environment, reputable secondary reporting is cited and flagged.