"Not laying off people, but also not hiring people"! What employment risks is the Federal Reserve concerned about?

The U.S. job market is caught in an unprecedented fragile balance: employers are neither laying off large numbers of employees nor actively hiring! This state of "low hiring, low layoffs" has maintained a relatively stable unemployment rate but has also made the job market extremely vulnerable, becoming a core concern for Federal Reserve policymakers.

According to a previous article from Jianwen, Federal Reserve Chairman Jerome Powell stated last Friday at the Jackson Hole central bank annual meeting that the "risk balance" facing the Fed's dual mandate of employment and inflation seems to be shifting. This statement stems from revised data in the July employment report, which showed that job growth in recent months has been far weaker than previously expected.

Powell described the current labor market environment as "peculiar," stating that the contraction in labor supply due to immigration restrictions has offset the impact of reduced demand. This abnormal situation suggests that the downside risks to employment are increasing. If these risks materialize, they could quickly manifest as a surge in layoffs and a rapid rise in the unemployment rate.

Analysts believe that this seemingly stable employment environment hides risks, which is also the source of Powell's concerns about downside risks to employment: due to the sluggish hiring activity, even a relatively mild increase in layoffs could quickly disrupt this fragile balance, leading the U.S. economy into a downward spiral of job losses.

Companies are not laying off, but also not hiring

Data from the U.S. Bureau of Labor Statistics shows that the hiring rate (the proportion of hires to total employment in the U.S.) was only 3.3% in June. This figure is not only lower than the 3.9% seen in February 2020 at the onset of the COVID-19 pandemic but is also far below the 4.6% during the strong rebound of the job market in November 2021.

Analysts believe that the slowdown in hiring may partly reflect the uncertainty brought about by Trump's tariff policies, which have made it difficult for some companies to plan. According to a July manufacturing survey by the Dallas Fed, one executive stated: "Tariff changes require a wait-and-see approach; there is no way to predict."

However, reports indicate that companies had already slowed their pace of hiring before Trump returned to the White House, possibly due to the Federal Reserve's significant interest rate hikes aimed at cooling the economy. Additionally, during the strong economic rebound post-pandemic, some employers may have over-hired.

While not hiring, employers have not been laying off large numbers of employees. In June, layoffs accounted for only 1% of total employment, which is not far from the historical low of 0.9% recorded during the strong job market in 2021.

Another measure of layoff activity—the number of initial unemployment claims—has risen over the past year but remains at a relatively low level.

Economists refer to this phenomenon of unwillingness to lay off employees during uncertain times as "labor hoarding." As economist Arthur Okun explained in 1963:

"It is worth it to reserve underemployed labor rather than risk hiring untrained workers when the business environment improves." This impulse to hoard has been stronger in recent years than in the past, as many companies have learned from the experience of struggling to find replacement employees after massive layoffs at the beginning of the pandemic.

Core Concern of the Federal Reserve: A Fragile Employment Balance at Risk of Being Disrupted

The risk behind this fragile employment balance is that even relatively few layoffs could lead to economic bleeding, further exacerbating policymakers' concerns.

Analysts point out that due to the low recruitment, even a moderate increase in layoffs could result in job losses in the U.S., and once this process starts, it is difficult to reverse.

In June, about 1.6 million people were laid off, with a layoff rate of about 1%. If this rate were to rise to 1.3% (the historical moderate level before the pandemic in February 2020), the number of layoffs would exceed 2 million. Without an increase in recruitment, the economy will struggle to absorb these layoffs.

Jon Faust, a researcher at the Johns Hopkins University Center for Financial Economics and a former senior advisor to Powell for six years, stated:

"When you are on the edge of job loss, it doesn't take much to get you into a downward spiral."

The Conference Board reported last week that one-fifth of U.S. employers surveyed plan to slow hiring in the second half of 2025, nearly double the proportion of companies expected to reduce hiring at the same time last year.

While a low-recruitment, low-layoff employment environment does not mean the job market is destined to collapse—after all, this state has persisted for more than a year—the low levels of job growth in recent months are enough to make the Federal Reserve uneasy, as this fragile balance could be disrupted at any moment.

Moreover, the current dynamics of low recruitment and low layoffs are harming the job prospects of some Americans. Young people find it harder to enter the job market, while wage growth for low-income workers who change jobs more frequently has noticeably slowed. More people are spending longer periods searching for jobs, with unemployment lasting at least six months