The early days of a new administration, and the impact to the U.S. labor market.

U.S. businesses added 151,000 new jobs in February, just below expectations. The unemployment rate ticked up to 4.1%, and 12-month wage growth was down to 4.0% from 4.1% in January.

February's jobs report highlighted the labor market's resilience. However, a cooling labor market, combined with layoffs in the U.S. Federal government, could mean the coming months show more labor market volatility.

The impact of Federal government layoffs on the private-sector labor market

The big story over the past couple of months has been the restructuring and layoffs in the U.S. Federal government. I am not here to litigate the merits of the policy decisions, but it’s important to understand how these changes could ripple through the economy and impact HR and business decisions.

??? Key Takeaways

• The impacts of Federal government layoffs and hiring freeze were minimal in February.
• An increase in the unemployment rate, along with further contraction in Federal government employment, is possible in the coming months.
• Job seekers could face increased competition for each open role in the private sector, and it may take longer to find a new position.
• Secondary effects could ripple through regions and industries with large shares of Federal government employees and contracts.
• Businesses that are hiring will have a larger pool of experienced talent.

Federal layoffs had a minor impact on February’s jobs report.

Last month, Federal government employment declined by 10,000 workers. These are likely the first signs of DOGE-related layoffs as well as the Federal hiring freeze announced on January 20th.

Next month’s jobs report is likely to shed more light on the extent to which Federal personnel decisions could impact on overall hiring and unemployment numbers.

Why will the layoffs show up in March (or later) and not February?

It has to do with the timing of the surveys that provide employment estimates. Businesses are surveyed mid-month, specifically the week that includes the 12th of each month. Since layoffs started in mid-February, employment and job loss impacts are likely to show up in March.

Context around Federal hiring.

On average, the Federal government has added around 11,000 new jobs each year for the past 25 years – fewer than 1,000 new jobs each month. Given there are around 3 million civilians in the Federal workforce, these gains are modest on a relative basis reflecting a 0.4% average annual growth rate, half of the overall employment growth rate for the U.S. during that time.

The Federal government also hires around 35,000 civilian workers each month as a result of net new hiring and backfilling open positions due to layoffs, voluntary quits, and retirements. Federal layoffs of 60,000 (based on what has already been proposed) could cause the U.S. unemployment rate to tick up at least a tenth or two-tenths of a percent to 4.2% or 4.3% if there are no other changes to the labor force.

How will this impact businesses, especially talent strategy?

The effects of these policies are twofold and will create more competition for each open role in the private sector. First, workers impacted by Federal government layoffs will be seeking private-sector employment in an environment where hiring has already cooled in most industries. Second, the hiring freeze means that the 35,000 employees typically hired by the Federal government each month will no longer have that as an employment option and will also seek jobs in the private sector.

Secondary impacts to watch.

This combination of a reduction in hiring and an increase in layoffs has the potential to ripple through the private sector.

Changes to the Federal workforce and the canceling or non-renewal of contracts has the potential to impact hiring and layoffs by Federal contractors, especially those in professional and scientific services.

Regionally, Washington D.C., Maryland, and Virginia will likely face disproportionate labor market impacts, but Federal government workers and contractors are in every state.

?? Job gains | Resilience continues but March could be different

The 151,000 jobs added in February came in just below expectations. With revisions, job gains for December and January were 2,000 higher than previously reported.

While this month’s hiring total was robust, we continue to see evidence that the labor market is cooling. High-profile cuts to the U.S. Federal workforce had a minimal impact last month but could have a substantial impact on March’s jobs report.

?? Industries | Challenges ahead for government, leisure and hospitality?

Once again healthcare (+52,000) led the way, accounting for over one-third of new jobs added last month.

Government (+11,000) and leisure and hospitality (-16,000), which have seen strong job gains in recent years, experienced slower job growth in February.

As explained above, government jobs, which include Federal, state, and local government as well as state and local education workers, was hampered by 10,000 job losses in Federal government roles.

Hiring in leisure and hospitality tends to be more volatile than in other industries so one month of data is no cause for concern. However, the sector’s employment growth can be a leading indicator of consumer sentiment.

?? Unemployment rate | Coming down, but a tough labor market for job seekers

The unemployment rate ticked up to 4.1% in February. Federal government layoffs in an already cooling labor market could lead to increases in unemployment over the next several months. Private-sector job openings will see increased competition from a growing pool of job seekers.

LaborIQ provides HR teams and business leaders with market-competitive compensation benchmarks. In an evolving job market, you need to know what salaries to offer to retain employees and fill open positions faster.

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