Dec 21st 2025|3 min read
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Lately economists have been vigorously debating the health of America’s labour market. Some argue that the jobs market is weakening, portending a downturn and requiring further interest-rate cuts from the Federal Reserve. Others disagree. And with inflation still above the Fed’s target, they say, the central bank should hold fire.
At first glance November’s jobs figures, published on December 16th after a delay caused by the recent government shutdown, appear to lend support to the employment pessimists. Unemployment increased to 4.6%, from 4.4% in September. And workers in at the margins of the labour market in particular are struggling, a development which in the past has been a warning sign of a wider downturn. Just how worrying is it this time?
Chart: The Economist
Over the past year, the unemployment rate of people aged between 16 and 24 has risen by 1.2 percentage points, and that for black Americans has gone up by 1.9 points (see chart 1). By comparison, the headline rate has increased by just 0.4 points. The number of people working part-time for economic reasons—those who want full-time jobs but can’t find them—has also risen appreciably. These are precisely the people likely to be hit first as the economy turns down.
One way to assess whether rising unemployment at the margins of the labour market really is a sign of trouble ahead is to modify the Sahm rule. The measure, devised by Claudia Sahm, a former Fed official, uses sharp increases in the unemployment rate to detect recessions. Today the indicator is still a little below the level taken to signal a downturn. But a version based on a blend of the unemployment rate for black Americans and those aged 16-24 crossed the recession threshold in August (see chart 2). This modified measure has signalled the past few recessions (excluding the covid-19 pandemic) a month or two ahead of the usual Sahm indicator.
Chart: The Economist
That might seem alarming. But there are good reasons to think things may not be so bad this time. For a start, the unemployment rates of other marginal groups, such as those without high-school diplomas, or Hispanic workers, have not risen so sharply. Black people are more likely than others to work in the public sector, and so part of the rise in their unemployment rate reflects government lay-offs throughout the year, including during the shutdown, rather than weakness in the private sector.
Young people, meanwhile, are especially vulnerable in America’s “no-hire, no-fire” economy. Conditions are not so bad that firms are laying workers off, but they are wary of taking new ones on. This is especially hard for people seeking their first job, or for those who left the labour force but are now looking to work again. Bosses’ reluctance to hire could in part reflect uncertainty about tariffs and the government’s antipathy to migration. As they get used to the new normality, they could become more willing to resume hiring.
Recent experience provides another reason not to hurry to cut rates further. When the jobs market roared back after the pandemic downturn, many at the Fed and elsewhere in government argued that loose monetary policy could help reduce racial and other disparities in employment: a hot jobs market pulled in everyone. But that effort ultimately backfired. The Fed kept policy too loose for too long in 2021-22, helping to spur a nasty bout of inflation. This time, central bankers might be eager to pounce on weakness in corners of the labour market. They should be wary of repeating past mistakes. ■
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