Unemployment Shows Signs of Plateauing Heading Into 2025

Amid elevated interest rates over the past year, labor conditions have softened considerably, which played an important role in shaping the Federal Reserve’s decisions to cut rates in September and November. Cooling labor market conditions have been most visible in slower hiring, but joblessness has also trended higher, with the Bureau of Labor Statistics’ unemployment rate increasing from 3.8% in October 2023 to 4.1% in October 2024. Additional signs of labor market softness are evident in Morning Consult’s surveys of consumers, which found that workers have recently been experiencing tougher job searches, more slack in the workplace and reduced wage-bargaining power. 

Morning Consult’s Unemployment index has followed a similar trend as the rate tracked by the BLS over the past year, but data through November shows the more recent trajectory has been generally more sideways than up. In fact, the four week moving average for the index was 1.3 points lower at the end of November compared with the end of October, suggesting unemployment fell slightly in the most recent month.

Layoffs remain flat and stable 

A notable feature of rising unemployment over the past year was that it was not driven by a sizable uptick in layoffs. In fact, year-to-date through September, the BLS reported slightly fewer layoffs in 2024 compared with the same period in 2023. Those who separated from jobs or entered the labor force have taken more time to find work as job openings dry up, leading to the increase in the rate of joblessness. Consequently, the recent reversal in the upward unemployment trend to a flat or downward trajectory may be an indication of shifts in these underlying drivers.

Morning Consult’s weekly lost pay and income tracker remained stable rather than decreasing. Therefore, the lower unemployment index value in November is more likely to be resulting from lower labor force participation (decreasing the share of unemployed workers) or stronger hiring gains, or a combination of both of these factors.

Labor force participation may be poised to stall

Both the BLS and Morning Consult calculate unemployment based on the share of jobless workers within the labor force. The labor force generally grows either through population growth or from those who previously were not in the labor pool deciding to search for work. Immigration has been a factor influencing the population size in recent years, however Morning Consult noted in previous research that the contribution to labor force growth by non-citizens has eased off in the latter half of 2024. Aligning with this trend, data from the BLS shows that the size of the labor force is no longer expanding as strongly as it was throughout most of the post-pandemic recovery: The annual growth rate for the overall labor force fell to its slowest pace since 2021 in October.

Morning Consult also collects data directly from consumers on their participation in the labor force. Across all adults, the share counted as members of the labor force increased 1.0 percentage points year-on-year as of the last week of November. 

Additionally, Morning Consult’s data on self-reported reasons for not participating in the labor force offer a more comprehensive view of worker flows over the past year. The shares of homemakers, retirees, students (very slightly) and those not working for non-specified reasons all declined, as more members of these categories chose to seek work. Partially offsetting the contribution of these individuals to the labor force was the uptick in the share of non-labor force participants reporting as disabled. The Social Security Disability Insurance program updated its rules this year to make it easier to apply for payments, and Morning Consult’s tracking showed an uptick in the share of non-workers starting in mid-2024 right around when the new rules went into effect.  

Worker supply may play a key role in shaping 2025 labor market

Looking ahead to 2025, labor force participation may continue to play a vital role in determining the unemployment rate. While many factors remain in flux–including the Federal Reserve’s decision-making on interest rates–recent trends and proposed policies of the new administration could point to a tightening labor supply. In order for unemployment to pick up, the labor force would need to be subjected to more slack, either through rising supply of workers or weaker demand for workers. 

However, the opposite outcome appears more likely. On the demand side, employer sentiment is looking up, potentially signaling expansionary expectations that may increase hiring. In addition to rising equity values following the election outcome, data from the Census Bureau shows businesses expect future performance and hiring to be stronger than current conditions.

On the supply side, a continuation of the trends contributing to slowing labor force participation growth seems more likely than not, at least when it comes to immigration. With tighter border controls and proposed deportations making up a central component of the incoming Trump administration’s campaign, non-citizen labor force entrants are unlikely to continue boosting worker supply in 2025. Improved access to insurance for the disabled per the 2024 rule changes may also reduce pressure on those individuals to keep working. 

Barring major changes to anticipated monetary and fiscal policies, or an unexpected economic shock, current indications suggest the softening observed in the labor market over the past year may be on the verge of some reversal. This would be a welcome development for workers, for whom the labor market softening has not gone unnoticed even as most who want a job remain employed. However, continued low unemployment at a time when inflation risks are gathering could present a challenge to the Fed, potentially increasing pressure to retain higher rates for longer.