February 2025 Labor Market Review: Job Gains Fall Short of Expectations

The Bureau of Labor Statistics (BLS) published its annual benchmark revision, reshaping our understanding of the recent U.S. labor market. The new data reveals:

• Job numbers for November and December 2024 were lower than previously reported.
• Total nonfarm payroll gains in 2024 were lower than earlier reports suggested.
• January 2025 job growth was more subdued than expected. 

This nuanced report suggests that while the U.S. labor market might be slightly cooler than previously thought, it remains robust and competitive. As such, business leaders have every reason to expect that attracting and retaining talent will remain a key challenge in 2025, particularly in high-growth fields such as health care.  

Let’s dive deeper into the numbers to see what the latest jobs data says about the current state of the labor market.

Employment Gains Fall Short of Analysts’ Expectations

Total nonfarm employment increased by 143,000 jobs in January 2025, falling slightly short of analysts’ expectations. Although job gains in January were modest relative to November and December, this employment growth remains consistent with a healthy and stable labor market. In the 12-month period from February 2024 through January 2025, nonfarm employment increased by an average of 168,000 jobs per month. This average pales in comparison to the overheated conditions that characterized much of the pandemic era but is still quite healthy by historical standards.

Total nonfarm employment grew in 16 out of 25 major industries in January 2025, including gains of at least 30,000 in health care and social assistance (66,000), retail trade (34,300), and government (32,000). All three of these sectors also performed well in December 2024; in fact, government employment was generally strong in 2024, and the health care and social assistance sector has been expanding consistently for many years.

On the opposite end of the spectrum, six sectors saw employment declines between December 2024 and January 2025, including a decline of 26,900 in administrative/support services.  

Whether or not these industry-level patterns continue throughout 2025 is a key question that we will be tracking closely. In particular, the federal hiring freeze and efforts to cut the federal workforce will likely limit (or even reverse) employment growth in government, and the redistribution of federal workers across other sectors may have interesting implications for the broader labor market. Having said so, it is very difficult to predict how these developments will evolve, even in the very near term.

Unemployment Rate Ticks Down Slightly 

For much of the last two years, unemployment rates have slowly risen from historically low levels; however, since the middle of 2024, they have shown signs of stabilizing or even declining. As of January 2025, the U6 rate held steady at 7.5%, while the U3 rate (i.e., the traditional unemployment rate) dipped slightly to 4.0%. Both of these rates are low by historical standards and are indicative of a healthy, stable labor market with low levels of labor underutilization.  

The U3 rate tracks the share of labor force participants who are jobless but able to work and actively seeking employment. The U6 rate uses a broader concept of labor underutilization by including people marginally attached to the workforce and people working part-time for economic reasons (in addition to the set of unemployed people captured in the U3 rate).

Wage Growth Remains Elevated

Average hourly earnings grew by 4.1% in January 2025, continuing a mildly increasing trend that began in the second half of 2024 after about two years of sustained decline. The current pace of wage growth is not alarming; however, it is elevated relative to recent decades and suggests that compensation costs could remain a key challenge for employers in 2025.

Labor Shortage Eases Slightly, but Persists 

The unemployed-per-job-opening ratio (UJOR) has been holding steady at 0.9 since June 2024, though more precise measurement reveals that the gap between job openings and the unemployed population narrowed somewhat between November 2024 and December 2024 (the last month for which data is available). There were just over 1 million more job openings than there were unemployed people in November 2024, whereas in December that gap had fallen to roughly 700,000. Even so, there are still hundreds of thousands more job openings than unemployed people, which suggests that recruiting and retaining talent continues to be a fundamental challenge for employers in 2025.

The UJOR is the ratio of the unemployed population (i.e., people without a job who are able to work and actively looking for employment) to the number of open jobs at a given point in time. When the value of this ratio is below 1, it means that even if every unemployed person could be immediately matched to an open job, there would still be unfilled positions at the end of this matching process. These conditions necessarily indicate a labor shortage in the overall labor market, though it is worth noting that other labor market frictions (e.g., skills mismatches between job seekers and open positions) can create a labor shortage even when the UJOR is above 1.

What Do These Findings Mean for You?

The labor market as we move through 2025 remains healthy, although job gains began the year at a modest pace and year-over-year wage growth was slightly higher than expected. While the labor market is still tight by historic standards, conditions have normalized considerably, and employers have every reason to believe that the overheated conditions of the pandemic era are long gone. From a policy point of view, this report will likely reinforce the Federal Reserve’s decision to hold off on further interest rate cuts in the near term.

Sydney Ross is an economic researcher at SHRM.