Despite rising economic headwinds, the U.S. labor market remains robust—and even mass layoffs of federal employees are unlikely to significantly drive up unemployment. Several factors are contributing to this resilience: a decline in imports, limited production supply due to labor shortages, an adjustment strategy based on reducing working hours instead of headcount, and the strong financial health of American companies. Eventually, the Federal Reserve is expected to intervene by cutting interest rates, easing the cost of capital for businesses.
Resilience in the Face of Adversity
The U.S. labor market has remained in reasonably good shape despite mounting economic challenges. Forecast indicators suggest that this resilience is likely to continue through the second quarter of 2025.
- Recession, yes—but mass layoffs, unlikely: The job vacancy rate is often the first to signal a downturn (expected in Q2–Q3 2025), but mass layoffs are not anticipated.
- Limited imports mean more local production and hiring: The U.S. is facing a unique combination of supply constraints (stronger than traditionally assumed) and tighter immigration policies. As a result, businesses are more inclined to retain their limited workforce, helping to avoid a sharp increase in unemployment.
- Corporate profits provide a cushion: Record profits are helping companies absorb the impact of tariffs and labor shortages, reducing the incentive to lay off workers.
- Unemployment will rise—but gradually: Unemployment is projected to peak at 5% by Q1 2026. Even if federal workers fail to find new jobs (but remain in the labor force), the unemployment rate would rise by only 0.3 percentage points in 2025.
- The Fed to the rescue: Gradual labor market deterioration is expected to prompt the Fed to accelerate rate cuts in late 2025 and early 2026, following a sharp inflation spike in summer 2025 triggered by new tariffs.
March Employment Report: Still Solid
In March, non-farm payrolls increased by 228,000, a signal of ongoing labor market strength, according to Allianz Trade. Private-sector job gains, excluding education and healthcare (the most cyclical segment), led the way—particularly in retail, transportation, and warehousing. Meanwhile, manufacturing job growth remained modest. The unemployment rate ticked up slightly to 4.2%. Government employment increased by 19,000, slightly below recent averages. Federal government employment fell by just 4,000, despite pressure from DOGE to reduce the federal workforce. This resilience likely reflects legal opposition to laying off probationary employees.
Job cut announcements in March and weekly unemployment claims through the end of the month confirm this ongoing labor market stability.
Short-Term Outlook: Four Leading Indicators
To assess the next three months, Allianz Trade examines four indicators:
- NFIB survey data on hiring plans and difficulty filling jobs,
- The Conference Board’s household survey on job search ease,
- Growth in temporary employment from non-farm data,
- Historical labor market trends during previous recessions.
These metrics currently send mixed signals but, overall, do not indicate imminent labor market deterioration. Notably, in the 2008 and 2020 recessions, the job vacancy rate deteriorated before unemployment and job growth, making it a key early signal.
Why the Labor Market Is Likely to Hold
Even with tariff-induced inflation and heightened political uncertainty, mass layoffs seem unlikely. U.S. companies continue to enjoy strong profits and are grappling with persistent labor shortages. Additional factors that support the labor market include:
- Limited slack in the economy: Allianz Trade’s proprietary output gap indicator (based on industrial capacity utilization and unemployment) remains largely positive—indicating tight supply conditions.
- Hour reductions over layoffs: Since the COVID-19 crisis, the average number of hours worked per employee has steadily declined, reflecting a strategy to cut hours rather than jobs.
- Strong real corporate profits: Companies have room to weather tariffs and are likely to prioritize temporary margin compression over job cuts.
Federal Job Cuts: Manageable Impact
Job cuts driven by DOGE in agencies like the Department of Education and USAID are expected to appear in upcoming data. Around 75,000 federal employees are expected to delay retirement or resignation, impacting October’s jobs report. Overall, federal employment may fall by nearly 200,000 this year, accounting for more than 10% of annual job growth. However, even in a worst-case scenario where these workers don’t find new employment but stay in the labor force, the unemployment rate would only rise by 0.3 percentage points.
A Polish Perspective: Similar Strength
Tomasz Starus, CEO of Allianz Trade in Poland, draws a parallel between U.S. and Polish labor markets:
“The Polish labor market remains strong—even if the era of wage hikes and employee dominance is fading. Despite downturns in manufacturing, construction, and services, Polish companies haven’t resorted to layoffs and likely won’t. We have the lowest unemployment rate in the EU (2.6% per Eurostat, February), and employers fear losing Ukrainian workers. Companies understand that their most valuable asset is their people—and on a national scale, Poland’s greatest asset is its citizens.”
He adds that the closure of many sole proprietorships has not increased unemployment, as these workers are being absorbed into formal employment due to their experience. Although corporate profitability and capital accumulation in Poland aren’t as strong as in the U.S., companies are still hiring—offering similar prospects for the Polish labor market.
Sources:
- LSGE Workspace
- Allianz Research
- Original article
