Why 2026 Could Be Tough for Job Hunters and Employers Alike

Is the labor market getting worse for employers, or for job seekers? Yes. And forecasters expect that to continue into the new year.

Several trends have combined to create a labor market that isn’t working out well for anyone. Job seekers are seeing fewer openings and staying unemployed longer—the long-term unemployment rate hit its highest since November 2021 in September.

Yet, employers are having a hard time finding qualified candidates, with certain industries, such as homebuilding, suffering from labor shortages. The result has been a sharp slowdown in job creation. The job market actually lost jobs in two months in 2025, something that hadn’t happened since the pandemic.

Economists forecast the U.S. economy will add an average of just 57,000 jobs per month in the first quarter of 2026, according to a survey of professional forecasters by the Federal Reserve Bank of Philadelphia.

That’s a sharp slowdown from the pre-tariff era. In the 12 months through April, when President Donald Trump announced his sweeping “Liberation Day” tariffs, job creation averaged 147,000 jobs per month. Since then, it has slowed to just more than a quarter of that level, at 38,600 per month.

If experts are correct, it’s no coincidence that job creation started to sputter when Trump announced worldwide tariffs. Business leaders and economists say the frequently changing trade policies is a major factor in the slowdown. Without much certainty about what tariffs they will have to pay on what items in the months and years ahead, companies have pulled back on expansion and hiring plans.

On top of that, businesses are increasingly using AI, which may also have an effect on the workforce. Whether employers replace large numbers of employees with AI could shape the job market in 2026.

This fall, economists at Goldman Sachs estimated AI will eventually replace 6% to 7% of existing jobs. However, if past technological innovations are any indication, new careers could emerge in their place.

Reduced Immigration Hurts The Workforce

As the demand for workers has fallen, so too has the supply. Trump’s crackdown on immigration has seriously reduced the number of people coming to the U.S. to work. Although economists debate the exact number of immigrants missing from the workforce, there is no doubt that the numbers have decreased significantly.

The Federal Reserve Bank of San Francisco estimated that 500,000 immigrants will arrive in the U.S. in 2025, down from 2.2 million in 2024, cutting the size of the workforce. Under one scenario modeled by Fed researchers in which the Trump administration deports one million people, the workforce essentially stops growing in 2025 and begins to shrink in the coming decades.

The Labor Market Paradox

Economists, not to mention officials at the Federal Reserve, aren’t sure whether the main problem with the job market is a lack of jobs, a lack of workers, or both.

“It’s still unclear to what extent decelerating job growth is being driven by falling labor demand versus labor supply,” Preston Caldwell, chief U.S. Economist at Morningstar, wrote in a commentary after the September jobs report was belatedly released in November.

The debate has implications for borrowing costs on all kinds of loans: Several officials on the Federal Reserve‘s policy committee have said they believe labor demand is falling faster than supply, meaning that the unemployment rate could rise. That could lead the Fed to cut interest rates in the coming year, in an effort to boost hiring.

There is no guarantee that they will, and if they do, whether those cuts will be successful. Either way, that could be the major story for the labor market in 2026.